Not all early stagers will necessarily be long-term winners.
In October, Wall Street celebrated its second year (and counting) of a roaring bull market. While a confluence of factors is responsible for eliminating the Dow Jones Industrial Average, S&P500And Nasdaq Composite To multiple record highs last year, none played a bigger role than the rise of artificial intelligence (AI).
AI gives software and systems the ability to make split-second decisions without the need for human input or intervention. It is a technology that has far-reaching utility in virtually all industries around the world.
Image source: Getty Images.
But as we’ve seen from other breakthrough technologies and innovations over the past decades, not all early stagers are necessarily winners in the long run. The wide variation seen in price targets for artificial intelligence stocks on Wall Street speaks to this mixed outlook.
Based on the low-water price targets of select Wall Street analysts, the next three leading AI stocks are expected to fall as much as 86% in the new year.
Supermicrocomputer: implicit 55% disadvantage
The first high-growth AI stock that at least one Wall Street analyst thinks will plummet by 2025 is a company that offers customizable rack servers and storage solutions. Super microcomputer (SMCI -5.15%). According to Mehdi Hosseini of Susquehanna, Supermicro stock is trading at $15 per share, which would represent a drop of as much as 55% from where the stock closed on January 3.
On paper, Supermicro is ideally positioned to benefit from the AI revolution. Companies pay a lot of money for the data center infrastructure needed to make split-second decisions, run generative AI solutions, and build/train large language models. In fiscal 2024, Supermicro’s net sales increased 110% to nearly $15 billion.
To add fuel to the fire, Super uses Micro Computer Nvidia‘s ultra-popular graphics processing units (GPUs) in its rack servers. Because Nvidia’s chips have superior computing speed, SuperMicro’s servers have become even more attractive.
But as you can see from Hosseini’s price target, things have not gone as planned. At the end of August, Super Micro Computer was the subject of a research report by well-known short seller Hindenburg Research, which alleged, among other things, ‘accounting manipulation’. Since this report, the company has:
If there is a breakthrough for Supermicro, it is that an independent special committee found no evidence of management misconduct and expected no revision to the company’s previous financials. Nevertheless, nothing is concrete until the company’s new accountant signs off on the financial statements and the company files its annual report with the Securities and Exchange Commission.
As competition in data center infrastructure increases, a wait-and-see approach seems sensible at Super Micro Computer.
Image source: Getty Images.
Palantir Technologies: implicit disadvantage of 86%
A second leading AI stock that could change course in the new year is the cloud-based data mining specialist Palantir Technologies (PLTR -2.52%). Although Palantir’s shares are up 1,140% over the past two years, RBC Capital analyst Rishi Jaluria sees the company’s stock falling to $11, which means a potential downside of 86% by 2025.
Palantir’s near-parabolic rise over the past two years reflects Palantir’s unique business model. The company’s AI-inspired Gotham platform, which helps federal governments collect data and plan missions, and the AI/machine learning-based Foundry platform, which brings big data visibility to businesses, don’t have a one-to-one large-scale replacements. This means that Palantir’s operating cash flow is safe and highly predictable.
In addition to Palantir’s irreplaceability, investors also appreciate the company’s shift to recurring profitability well ahead of schedule. The multi-year contracts earned from the U.S. government have helped support double-digit revenue growth and decisively pushed Palantir into the profit column.
However, sustaining the game-changing stock gains could prove challenging. For starters, the long-term growth trajectory for Gotham has a built-in ceiling. Palantir’s management team will not allow China, Russia and other US non-allies access to its intuitive platform.
Perhaps the bigger problem for Palantir, a clear concern of Jaluria, is the company’s valuation. Throughout history, companies at the forefront of the next big innovations have often reached the top with a price-to-sales ratio (P/S) of 30 to 40. Palantir currently has a P/S ratio of almost 73. . While a premium valuation is justified given the company’s irreplaceability, no company has been able to sustain such a high valuation.
While an 86% drop, as Jaluria has forecast, seems a bit excessive for a company with sustained double-digit growth, a significant correction would not be a surprise.
SoundHound AI: implicit disadvantage of 66%
The third leading AI stock that could plummet in the new year, based on a Wall Street analyst’s price forecast, is a specialist in AI speech recognition and conversational technologies. SoundHound AI (SOUND -16.44%). Ladenburg Thalmann analyst Glenn Mattson expects SoundHound shares to return from over $20 to just $7 by 2025, which would represent a 66% decline.
Similar to Palantir, SoundHound AI’s shares have gone virtually parabolic in recent months. The wind in SoundHound’s sails has to do with its position in the next phase of AI evolution. The rise of AI agents is expected to be the hottest artificial intelligence trend this year. SoundHound envisions a world where AI voice integration and intuitive commands can unite voice ecosystems.
The company is currently growing like crazy, with reported third quarter revenue up 89% over the same period last year, and the company’s largest customer accounting for just 12% of net revenue, down from 72 %. This indicates that SoundHound’s efforts to enter new vertical markets and acquire new customers are helping to diversify and strengthen its revenue stream.
On the other hand, SoundHound Ai is not profitable, and it is burning quite a bit of money as it expands into new verticals. During the first nine months of 2024, more than $75.7 million in cash was used for operating activities. Even with revenue expected to potentially double by 2025, the company’s cash burn and operating losses are likely to persist.
SoundHound’s valuation is also concerning. While traditional fundamental metrics like price-to-earnings (P/E) ratios don’t work for start-up companies, SoundHound’s price-to-earnings ratio of 94 suggests an unsustainable recent share price rise.
Finally, history has been unkind to next-big-thing innovations for thirty years. Investors have consistently overestimated the adoption rate and usefulness of new technologies at their early stages, ultimately leading to the bursting of a bubble. While this doesn’t mean AI won’t be an eventual game changer, it does imply that every innovation takes time to mature – even artificial intelligence. If the AI rally slows, companies that value a hefty premium, like SoundHound AI, could take advantage.
