In the past year, shares of Palantir Technologies (PLTR +1.25%) have nearly doubled, and shares of Micron Technology (MU 3.21%) have more than quadrupled. But certain Wall Street analysts think these popular artificial intelligence stocks are wildly overvalued.
- Brent Thill at Jefferies has set Palantir with a target price of $70 per share. That implies 55% downside from the current share price of $157.
- William Kerwin at Morningstar has set Micron with a target price of $225 per diluted share. That implies 40% downside from the current share price of $380.
Here's what investors should know about Palantir and Micron.
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Palantir Technologies: 55% downside implied by Jefferies' target price
Palantir develops analytics and artificial intelligence (AI) software that helps clients in the public and private sectors manage and make sense of complex data. Forrester Research has recognized the company as a leader in AI platforms and AI decisioning software, and the International Data Corporation (IDC) has ranked Palantir as a leader in decision intelligence software.
Palantir has differentiated itself with an ontology-based software architecture. In this case, an ontology is a decisioning 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 financial results in the fourth quarter. Revenue increased 70% to $1.4 billion, the tenth consecutive acceleration, and non-GAAP (non-generally accepted accounting principles) net income increased 79% to $0.25 per diluted share. The company also achieved a record Rule of 40 score of 127%, which is simply unprecedented across the software industry.
NASDAQ: PLTR
Key Data Points
Sanjit Singh at Morgan Stanley recently wrote, "It's hard to find a better fundamental story in software than Palantir." However, not even the most fundamentally sound company in the world is 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 forecast to increase at 57% annually through 2027.
Here's the big picture: Palantir is growing at a rapid pace, and its unique software affords the company a competitive advantage. But the stock could fall sharply if Palantir fails to impress the market with future financial reports. I doubt shares will drop 55% in the next year in the absence of a significant catalyst, but investors should still keep positions in Palantir relatively small.
Micron Technology: 40% downside implied by Morningstar's target price
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, and it gained share in both categories over the past year, while industry leader Samsung lost share. However, those share gains were primarily driven by a supply shortage rather than a competitive moat. Memory chips have been commoditized, which means chips from different companies are basically interchangeable, according to William Kerwin at Morningstar.
Micron delivered strong first-quarter financial results. Revenue soared 56% to $13.6 billion, and non-GAAP net income increased 167% to $4.78 per diluted share. While impressive, the driving force behind those numbers was price increases made possible by the supply shortage. But the memory chip industry is cyclical, meaning the shortage will eventually become a supply glut, at which point prices are likely to crater.
NASDAQ: MU
Key Data Points
Micron currently trades at 33 times adjusted earnings, a seemingly cheap valuation for a company whose adjusted earnings more than doubled in the last quarter. But the market may afford the company a much lower multiple once memory chip demand has peaked. Indeed, Wall Street estimates that earnings will increase quickly through fiscal 2027, then fall sharply through fiscal 2029.
Here's the bottom line: Micron lacks a material economic moat despite its size, and the stock could fall sharply once the market has visibility beyond the memory chip supply shortage. I doubt shares will decline 40% in the next year, but investors should keep any positions in Micron relatively small.
