What is the modern equivalent of King Midas turning everything he touched into gold? Artificial intelligence (AI) is a prime candidate. Many stocks in the AI sector have seen meteoric gains over the past 18 months. Nvidia (NASDAQ:NVDA) is the most famous example, with demand for its AI chips helping to push the company’s market capitalization above $3 trillion.
But all good things must end. While analysts still think Nvidia has some room to run, they aren’t as bullish on all AI stocks. Here are three high-flying AI stocks that Wall Street says are falling.
1. Arm holds
Actions of Fire arms (NASDAQ:ARM) have skyrocketed more than 120% since the start of the year. That gain isn’t as big as Nvidia’s, but it’s in the same ballpark.
Arm designs semiconductors and software widely used in central processing units (CPUs). The company’s revenue jumped 47% year over year in its most recent quarter to $928 million, an all-time high. More than half of this revenue comes from royalties paid by customers using its chip architecture.
AI is a key growth engine for Arm. The company believes that demand for energy-efficient AI capabilities in data centers and edge devices will drive increased sales of its technology. She is particularly optimistic about the prospects of Nvidia’s Grace Blackwell superchip, which uses Nvidia’s Blackwell chip. graphics processing unit (GPU) architecture combined with Arm’s Grace processor.
However, Wall Street is not optimistic about Arm’s near-term prospects. The 12-month average price target for the stock is 29% below the current share price. The most pessimistic analyst predicts that Arm’s stock price could fall 65%.
2. Palantir
Palantir Technologies (NYSE:PLTR) is another big AI winner. Shares of the data analytics software developer are up nearly 50% in 2024, driven mainly by a big jump in February.
The company’s flagship product is its artificial intelligence platform (AIP). Palantir’s revenue jumped 21% year over year in the first quarter of 2024 to $634 million, largely driven by AIP momentum.
Ryan Taylor, Palantir’s chief revenue officer and general counsel, said during the company’s first-quarter earnings call that “the applications for AIP seem endless.” He added, “We’ve shared our plans to conquer the market with AIP. And our results show that our strategy is not only succeeding, it’s accelerating.”
Despite AIP’s outlook, analysts believe Palantir’s momentum will soon come to a grinding halt. The average 12-month price target for the stock is about 15% below the current share price.
3. Arista Networks
Arista Networks (NYSE: ANET) has taken investors on a meteoric rise this year. However, it’s been a fun ride overall for investors, with Arista shares soaring 50%.
The company provides cloud networking technology. AI has played a significant role in the rapid migration of organizations to the cloud for training and deployment. large language models (LLM)Arista was a direct beneficiary of this trend, with its revenue jumping more than 16% year over year in the first quarter to $1.57 billion.
Jayshree Ullal, CEO of Arista, believes more growth is on the way. It estimates that the total addressable market for client-cloud AI networks is at least $60 billion. And she sees this market as Arista’s must win.
Wall Street isn’t particularly pessimistic about Arista, but it’s not optimistic either. The 12-month average price target for the stock is about 6% below the current share price.
Is Wall Street Right About These AI Stocks?
Maybe analysts’ price targets for Arm, Palantir, and Arista will prove prescient; maybe they won’t. No one knows for sure how a stock will perform over the next 12 months.
I will note, however, that the growth prospects of all three AI stocks already appear largely priced into their stock prices. Price-to-earnings-to-growth (PEG) ratios for Arm, Palantir and Arista, based on five-year growth projections, are near or above 2.0.
I think these stocks should continue to move higher over the long term. However, I wouldn’t be surprised if one or all of them pulled back somewhat over the next 12 months.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Arista Networks, Nvidia and Palantir Technologies. The Mad Motley has a disclosure policy.
Wall Street Thinks These High-Flying Artificial Intelligence (AI) Stocks Are Headed Down (Hint: Nvidia Isn’t One of Them) was originally published by The Motley Fool
