Year to date, Palantir Technologies (PLTR -5.39%) shares have skyrocketed 140% and Oracle (ORCL -1.33%) shares have climbed 73%. Investors clearly expect the companies to be big winners as artificial intelligence spending increases, but these Wall Street analysts think the stocks are overvalued:

  • Brent Thill at Jefferies has a sell rating on Palantir. His target price of $60 per share implies 67% downside from the current share price of $183.
  • Alexander Haissl at Redburn Atlantic has a sell rating on Oracle. His target price of $175 per share implies 40% downside from the current share price of $290.

Here's what investors should know about these popular artificial intelligence stocks.

1. Palantir Technologies: 67% implied downside

Palantir provides analytics software to commercial enterprises and government agencies. Its core products, Gotham and Foundry, integrate data and machine learning models into a decisioning framework called an ontology. It also provides an adjacent artificial intelligence platform that lets clients build generative AI into applications and business processes.

Palantir had 849 customers as of June 30, far fewer than most large software companies. Data analytics competitor Snowflake recently reported more than 12,000 customers. Nevertheless, Palantir's ontology-based software architecture and its use of forward deployed engineers -- developers who work closely with specific clients to build custom features -- set the company apart from the competition.

Several industry experts have praised Palantir. In particular, the International Data Corp. (IDC) recently ranked the company as the market leader in decision intelligence software. Also, Forrester Research recognized it as a technology leader in artificial intelligence platforms. "Palantir is quietly becoming one of the largest players in the this market," wrote Principal Analyst Mike Gualtieri.

Palantir reported impressive second-quarter financial results. Revenue increased 48% to $1 billion, the eighth consecutive acceleration, and non-GAAP net income increased 77% to $0.16 per diluted share. And Palantir is well-positioned to maintain that momentum. IDC estimates AI platform spending will increase at 41% annually through 2028.

However, Palantir is one of the most expensive software stocks in history and its present valuation is not sustainable over the long term, according to Brent Thill at Jefferies. Shares currently trade at 345 times adjusted earnings, an absurd multiple for a company whose earnings are forecast to grow at 37% annually through 2026. It is very possible that Palantir drops 67% at some point in the future. Shareholders with large positions should consider trimming.

2. Oracle: 40% implied downside

Oracle provides a broad range of enterprise software and cloud services. The company is best known as the market leader in database management systems, but it also has a strong presence in enterprise resource planning software and customer relationship management software. Those three markets are forecast to expand between 12% annually and 15% annually through 2030, according to Grand View Research.

Additionally, Oracle is the fifth-largest public cloud as measured by infrastructure services spending, and that part of its business is likely to be the most powerful growth driver in the coming years. The cloud services market is forecast to grow at 20% annually through 2030 due to demand for AI infrastructure, an area where Oracle has invested aggressively.

Oracle reported mediocre financial results in the August quarter, missing estimates on the top and bottom lines. But the stock surged more than 30% because momentum in the Oracle Cloud Infrastructure (OCI) segment stunned Wall Street. Remaining performance obligation (RPO) -- contracted revenue not yet recognized -- soared 359% to $455 billion.

Oracle signed four multi-billion dollar deals with three different customers in the quarter. CEO Safra Catz said, "Over the next few months, we expect to sign up several additional multi-billion dollar customers and RPO is likely to exceed half a trillion dollars." In total, Oracle expects cloud infrastructure revenue to increase at 70% annually during the next five years.

Oracle is doing an admirable job competing against larger cloud services companies like Amazon, Microsoft, and Alphabet. But investors probably reacted too strongly to the good news about its cloud infrastructure business. The stock trades at 67 times earnings, a pricey valuation when earnings are forecast to grow at 19% annually over the next three years. Shares may trend lower in the coming months, but I doubt the stock will fall 40%.