The S&P 500 (^GSPC 1.52%) is set to close out 2025 on a high note. The widely followed stock index sits near its all-time high after a strong bull run that's lasted over three years. Technology stocks have been the driving force behind the index's climb, fueled by big tech's heavy spending on new artificial Intelligence (AI) data centers and investor optimism about the potential for AI to boost earnings potential.
But some of the biggest companies leading the stock market higher may have gotten ahead of themselves. Investors are paying a premium price based on unreasonable expectations for sales and earnings growth, even as AI spending continues to soar. As a result, some Wall Street analysts see significant downside in a lot of the bull run's biggest winners. Two incredibly popular stocks are worth highlighting.
- Palantir Technologies (PLTR +1.25%): RBC Capital has a $50 price target, representing downside of 74% from the stock price as of this writing.
- CoreWeave (CRWV 2.71%): DA Davidson has a $36 price target, representing downside of 54% from the stock price as of this writing.
Here's why the analysts are so bearish on these popular stocks and why readers may want to avoid them.
Image source: Getty Images.
1. Palantir: The fast-growing AI software giant
Palantir helps businesses make sense of all the data they collect and generate. With the growing amount of data generated in everyday businesses, the total addressable market for Palantir is huge. And it took a major step toward capturing that potential market in 2023 with the launch of its Artificial Intelligence Platform (AIP).
AIP allows Palantir users to take advantage of large language model capabilities. It enables them to interact with their data and Palantir's models using natural language. That significantly lowers the technical expertise required to get the most out of the software and expands its use cases across enterprises. Management points to AIP as the reason for its accelerating revenue growth and profitability.
NASDAQ: PLTR
Key Data Points
Last quarter, Palantir produced revenue growth of 63%, with U.S. commercial revenue climbing 121%. As it scales, Palantir is exhibiting significant operating leverage. Adjusted operating margin for the quarter came in at 51%. That gives Palantir a Rule of 40 score (revenue growth plus operating margin) of 114. The rule suggests any number above 40 is considered worthy of investment.
To be sure, Palantir is exhibiting extremely impressive growth, indicating there's a big addressable market its capturing. But investors don't just want to buy great companies; they want to pay a fair price. It's hard to argue Palantir's current stock price is fair value. Its forward P/E ratio of 268 and price-to-sales ratio exceeding 100 are both astronomically expensive. The market is pricing Palantir as if revenue will accelerate forever. RBC Capital's analysts warn that multi-year U.S. commercial contracts may be pulling forward demand. So, a drop in revenue growth wouldn't be all too surprising in the near future.
2. CoreWeave: The cloud infrastructure company winning big contracts
CoreWeave builds and outfits data centers and rents the capacity to customers like Microsoft, Nvidia, OpenAI, and Meta Platforms. The company is growing quickly, with revenue climbing 134% in the most recent quarter.
CoreWeave is highly leveraged, though. It signs big contracts with its customers before it has the capacity to serve them. It uses those contracts as collateral to take out loans, which it uses to finance new data centers, servers, and equipment. As a result, it now has $14 billion in debt on its balance sheet, double the amount from this time last year.
Many point to the strong growth in revenue and its even faster backlog growth as a reason why CoreWeave's debt strategy is sound. CoreWeave's revenue backlog climbed to $55.6 billion as of the end of last quarter. That's more than double in just six months.
NASDAQ: CRWV
Key Data Points
But that backlog isn't guaranteed revenue. Many of its customers can reduce or pull out of their contracts. And any slip-ups can lead to lost revenue opportunities. That's why investors sent shares lower following management's report that one of its data center developers is experiencing supply chain delays. If CoreWeave doesn't have the capacity, it can't rent it.
But there's another problem with CoreWeave's reliance on debt that DA Davidson analyst Gil Luria points out. The unit economics just don't make sense. CoreWeave is paying more in interest than it generates in operating income. The company generated $217 million in adjusted operating income last quarter. Operating margin notably compressed five percentage points to 16%. Meanwhile, its interest expense topped $310 million. CoreWeave needs to show expanding operating margins for it to scale profitably, Luria argues. Otherwise, taking on more debt will only lead to greater losses.
Even after the tumble the stock took after management's revised outlook for the fourth quarter, there's still significant risk in investing in CoreWeave. Another delay in its data center, a pullback in spending from a large customer, or further deterioration in its margins could send the stock even lower.
