Over the past year, shares of Palantir Technologies (PLTR 0.32%) have almost doubled, and the shares of Micron technology (MU +5.00%) have more than quadrupled. But certain Wall Street analysts believe these popular artificial intelligence stocks are vastly overvalued.
- Brent Thill op Jefferies Palantir has set a price target of $70 per share. That implies a 55% downside to the current share price of $157.
- William Kerwin op Morning star Micron has set a price target of $225 per diluted share. That implies a 40% downside from the current share price of $380.
Here’s what investors need to know about Palantir and Micron.
Image source: Getty Images.
Palantir Technologies: 55% downside implied by Jefferies’ target price
Palantir develops analytics and artificial intelligence (AI) software that helps customers in the public and private sectors manage and understand complex data. Forrester research has recognized the company as a leader in AI platforms and AI decision software, and the International Data Corporation (IDC) has ranked Palantir as a leader in decision intelligence software.
Palantir has distinguished itself with an ontology-based software architecture. In this case, an ontology is a decision framework that becomes increasingly effective as underlying machine learning models capture more data. Most analytics software products are built around reporting and visualization, which is less useful in driving operational efficiency.
Palantir reported impressive fourth-quarter financial results. Revenue rose 70% to $1.4 billion, the tenth consecutive acceleration, and non-GAAP (non-generally accepted accounting principles) net income rose 79% to $0.25 per diluted share. The company also achieved a record Rule of 40 score of 127%, which is simply unprecedented in the software industry.
Today’s change
(-0.32%)$-0.50
Current price
$156.66
Key data points
Market capitalization
$376 billion
Day range
$152.99 -$158.45
Range of 52 weeks
$66.12 -$207.52
Volume
1.7 million
Avg. full
48M
Gross margin
82.37%
Sanjit Singh op Morgan Stanley recently wrote, “It’s hard to find a better fundamental story in software than Palantir.” But even the most fundamentally sound company in the world isn’t worth buying at any price. Palantir shares currently trade at 209 times adjusted earnings, a very rich valuation even for a company whose adjusted earnings are expected to grow 57% annually through 2027.
Here’s the big picture: Palantir is growing at a rapid pace, and its unique software gives the company a competitive advantage. But the stock could fall sharply if Palantir fails to impress the market with future financial reports. I doubt the stock will fall 55% in the next year absent a significant catalyst, but investors should still keep their positions in Palantir relatively small.
Micron Technology: 40% downside implied by Morningstar’s price target
Micron develops memory and storage solutions for personal computers, mobile devices, data center servers and automotive systems. The company specializes in DRAM memory products, including high-bandwidth memory (HBM) and NAND flash memory products. Both types are important for artificial intelligence.
Micron is the third largest supplier of DRAM and NAND memory, gaining market share in both categories over the past year, while market leader Samsung lost share. However, these market share gains were mainly the result of a shortage of supply and not competition. Memory chips have become commoditized, meaning chips from different companies are effectively interchangeable, according to Morningstar’s William Kerwin.
Micron posted strong first-quarter financial results. Revenue rose 56% to $13.6 billion, and non-GAAP net income rose 167% to $4.78 per diluted share. While impressive, price increases were the driving force behind these figures, made possible by the shortage of supply. But the memory chip industry is cyclical, meaning the shortage will eventually turn into a supply glut, after which prices will likely fall.
Today’s change
(5:00 am%)$6:50 PM
Current price
$388.80
Key data points
Market capitalization
$417 billion
Day range
$357.69 -$390.00
Range of 52 weeks
$61.54 -$455.50
Volume
1.3 million
Avg. full
34M
Gross margin
45.53%
Dividend yield
0.12%
Micron currently trades at 33 times adjusted earnings, a seemingly cheap valuation for a company whose adjusted earnings more than doubled last quarter. But the market may offer the company a much lower multiple once memory chip demand reaches its peak. Wall Street estimates that profits will rise rapidly in fiscal year 2027 and then fall sharply in fiscal year 2029.
The bottom line: Micron doesn’t have a material economic moat despite its size, and its shares could fall sharply once the market comes to grips with more than just the memory chip shortage. I doubt the stock will drop 40% in the next year, but investors should keep their positions in Micron relatively small.
