Recent advances in artificial intelligence (AI) have led many businesses to look at how to incorporate the technology into their operations to improve earnings results. Out of the 500 companies in the S&P 500, 287 mentioned AI during their earnings call in the most recent quarter. That's up from less than 100 as of the end of 2022, when OpenAI's ChatGPT first came on the scene.
While investor excitement has pushed many AI stocks significantly higher over the last few years, some may have gotten ahead of themselves. Wall Street analysts see two of the biggest winners of the AI boom falling considerably over the next year, as the market isn't accounting for the risks involved in these investments.
Here are two AI stocks that could see their stock prices plummet up to 75%, according to select Wall Street analysts.
Image source: Getty Images.
1. CoreWeave
CoreWeave (CRWV 2.27%) specializes in renting GPU servers to artificial intelligence developers and helping larger hyperscale cloud providers meet their customers' demand for compute. One of CoreWeave's biggest investors is Nvidia (NVDA +1.67%), which owns roughly 7% of the company. That relationship ensures CoreWeave gets priority access to Nvidia's coveted GPU systems, making it a key supplier of compute for the industry.
Nvidia recently built on its relationship with CoreWeave, signing a contract to buy any unused capacity from CoreWeave as part of a $6.3 billion GPU purchase. That essentially gives the cloud computing company carte blanche to build out capacity, ensuring that its virtuous cycle of growth can continue through at least 2032, when the contract ends.
CoreWeave has grown quickly by taking on debt to build new data centers, which it outfits with Nvidia chips and then rents to customers in need of compute. The growing demand for AI compute enabled it to easily rent out its capacity, giving it more revenue, which it can use to raise more debt and build more capacity.
NASDAQ: CRWV
Key Data Points
But even with Nvidia acting as a backstop, the stock comes with significant risks. For one, it has a huge customer concentration challenge. Microsoft represented 71% of its revenue last quarter. Meanwhile, Microsoft is building out its own capacity as fast as possible. And any drop in demand from Microsoft could significantly harm the virtuous cycle powering CoreWeave's growth. Nvidia's backstop will help, but the growth will completely sputter.
CoreWeave's singular focus and its reliance on Microsoft are the biggest reasons HSBC analyst Abhishek Shukla put a $32 price target on the stock earlier this year. That's the lowest on the Street, representing a 75% decline from the stock price as of this writing. While CoreWeave has had some positive developments since that analyst note, the stock still faces significant risks with its extremely high debt load.
2. Palantir Technologies
Palantir Technologies (PLTR +2.45%) makes software that helps businesses and government agencies draw actionable insights from their massive and disparate data sets. The company's data ontology software received a significant boost from the development of its Artificial Intelligence Platform (AIP). The addition allows enterprises to plug in a large language model and use natural language to interact with its software. That's expanded the use cases for Palantir while making it easier for more users to take advantage of its powerful features.
Palantir has been growing quickly as a result. Last quarter's sales climbed 48% year over year. It's seeing even stronger results among U.S. commercial customers, up 93% year over year. On top of that, it's showing very strong operating leverage, as the company's product-first strategy has kept its marketing and sales expenses relatively low. Adjusted operating margin expanded to 46% last quarter, giving it a Rule of 40 score of 94.
NASDAQ: PLTR
Key Data Points
The future looks bright for Palantir as well. Its remaining deal value among U.S. commercial customers sat at $2.79 billion as of the end of last quarter, up 145% year over year. And it signed a $10 billion contract with the U.S. Army in August.
But Wall Street thinks the stock may have gotten ahead of the results. RBC Capital's analysts put a $45 price target on the stock following the news of its U.S. Army contract. That represents a 75% drop from its stock price as of this writing. The big reason for the low price target is Palantir's valuation, providing an "unfavorable risk-reward" profile. Indeed, the stock currently trades for over 100 times forward sales estimates and over 275 times forward earnings estimates. Palantir needs to grow at a breakneck pace for years to come in order to justify those valuations, and any misstep or disappointing earnings report could send shares plummeting.
