Some Wall Street analysts see big downsides for Tesla and Palantir Technologies shareholders.
A gold rush driven by artificial intelligence (AI) is in full swing.focused on technology Nasdaq Composite It has risen 31% over the past year as investors flocked to the market hoping to get rich quickly. While sentiment remains overheated, it's important to be cautious when buying stocks. Not all companies are long-term winners, and even the best companies are not good investments at any price.
With this in mind, some Wall Street analysts see big downside for two popular AI stocks. tesla (TSLA -3.55%) and Palantir Technologies (PLTR -0.84%). Here's what investors need to know.
Tesla: JPMorgan Chase's $115 per share price target implies 29% downside
ryan brinkman JP Morgan Chase He announced earlier this month that Tesla had reported first-quarter car deliveries that were significantly lower than expected, and he lowered his sales and profit forecasts. Brinkman also lowered his year-end price target to $115 per share, representing a 29% decline from the current price of $161 per share.
Tesla has a demand problem. Global electric vehicle sales rose just 31% last year, a sharp slowdown from the 60% increase the year before, according to research firm Law Motion. Growth markets naturally lose momentum over time, and in this case it's due to macroeconomic headwinds. Specifically, high interest rates are a major deterrent to big-ticket purchases like electric cars, especially when cheaper options exist.
Tesla lowered prices to compensate for weak demand, which slowed growth and squeezed profit margins. The company has released a series of increasingly disappointing financial reports over the past year, culminating in a disastrous fourth quarter. Revenue increased only 3% to $25.2 billion, and non-GAAP (adjusted) net income decreased 40% to $0.71 per diluted share. Management also warned that car sales growth in 2024 could be significantly slower as the company prepares to manufacture next-generation (low-cost) cars in 2025.
The situation was more dire than Wall Street expected. Tesla deliveries in the first quarter fell 8.5% to 386,810 vehicles, missing even the most bearish estimates. The company hasn't seen a decline in deliveries since the first quarter of 2020, which was caused by the COVID-19 pandemic. To make matters worse, Tesla has canceled plans to make low-cost electric vehicles that could have expanded its target market, according to Reuters.
There's more bad news. Several executives have left Tesla over the past year, including former chief financial officer Zach Kirkhorn, who was being discussed as a potential successor to CEO Elon Musk. The company also announced plans to lay off 10% of its global workforce earlier this week, a sign that consumer demand may be deteriorating.
On the bright side, Tesla is doubling down on its artificial intelligence (AI) ambitions. Musk said fully self-driving (FSD) software will eventually be the main source of profitability, and said the company plans to unveil robotaxis at an event on August 8. If the company provides a specific date, that could be a positive turning point. Launch of autonomous vehicle dispatch network. Or it could be a negative inflection point if you fail to make an impression on the company.
Investors should note that Brinkman is not the only analyst seeing a significant downside for Tesla.with Colin Langan wells fargo The company recently lowered its 12-month price target to $120 per share, representing a 25% downside. “We expect sales volumes to disappoint as the impact of price cuts on demand wanes,” he said in a note to clients.
The conclusion is: Tesla remains the global leader in battery electric vehicle sales, but the company is struggling with demand and cancellation issues that could hinder its near-term growth. As a result, the stock price could certainly fall in the short term, especially if the company fails to reassure investors when it releases its first-quarter results on April 23. Personally, I'm going to wait and see, neither buying nor selling, until management provides some information. Improve visibility of your product roadmap.
Palantir Technologies: RBC Capital's $5 per share price target implies 77% downside
RBC Capital's Rishi Jallia lowered Palantir Technologies' price target to $5 per share after lackluster financial results in the second half of 2022. He stuck with this estimate, which implies a 77% decline from the current price of $22 per share, even though the stock has soared 150% over the past year. These gains were driven by Palantir's role in the artificial intelligence value chain and, to a lesser extent, excitement over its recent award of the U.S. Army Titan contract.
Jaluria says Palantir will monetize the AI it generates even as the company touts unprecedented demand for its AIP (artificial intelligence platform), a new product that brings massive language model support to its Foundry platform expressed concerns about competency. To elaborate, Palantir sells software that allows clients to manage data and machine learning (ML) models and incorporate them into applications that improve decision-making. His AIP product at the company further powers clients by adding generative AI capabilities to Foundry.
Jallia also attributes his bearish outlook to valuations. “This is a company that trades at 25 times sales and is growing less than 20%, which is unheard of in the software industry,” he told Yahoo Finance in an interview in March. These numbers have since changed, but the point still stands. Wall Street expects Palantir's sales to grow 21% annually over the next five years, especially given the two-year average of 13.7x sales, which is at a current valuation of 22.6x sales. The amount will seem expensive.
But Jallia may be too pessimistic when it comes to artificial intelligence. Wedbush Securities' Dan Ives recently called Palantir an AI launchpad and previously said the company is “probably the best name in pure AI.” moreover, forrester research Palantir is recognized as a leading AI/ML platform vendor
The conclusion is: I think Palantir will benefit as spending on AI increases, but the stock trades at a premium valuation compared to the revenue growth Wall Street expects. Therefore, if the company misses expectations when it releases its first quarter report on May 6, it could lead to a significant decline. As such, we think investors should avoid buying this stock until it trades at a more reasonable price. Given the recent rally, it may be wise to cut positions that are too large now.
JPMorgan Chase is an advertising partner of The Motley Fool's Ascent. Wells Fargo is an advertising partner of The Motley Fool's Ascent. Trevor Jennewine has positions at his Palantir Technologies and Tesla. The Motley Fool has positions in and recommends JPMorgan Chase, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.