Two AI Stocks Analysts Predict May Plummet by Nearly 60%, Despite Recent Surge

Key Insights

• Despite more than doubling in value this year, certain AI stocks like Palantir and CoreWeave are expected by some analysts to experience sharp declines in the coming months.
• Palantir claims its unique software architecture gives it an edge in meeting AI demand, but it's currently the most expensive stock in the S&P 500 by a significant margin.
• While CoreWeave's debt-heavy business model is affecting profitability, the company operates a leading AI cloud service and trades at a comparatively reasonable valuation.

Palantir Technologies (NASDAQ: PLTR) has seen its shares climb 105% this year, while CoreWeave (NASDAQ: CRWV) stock has risen by 115%. However, some Wall Street analysts have issued sell ratings on these stocks, with their price targets suggesting substantial potential losses for shareholders:

• Jefferies analyst Brent Thill has set a 12-month target price of $60 for Palantir, implying a 61% downside from its current $155 share price.
• D.A. Davidson's Gil Luria has given CoreWeave a 12-month target price of $36, suggesting a 59% downside from its current $88 share price.

Let's delve deeper into what investors should consider about these popular AI stocks.

Palantir Technologies: Potential 61% Downside

Palantir specializes in data analytics software development. Its primary platforms enable users to integrate, organize, and visualize complex data, supporting decision-making across defense, intelligence, and corporate sectors. The company has also developed an AI platform (AIP) that allows developers to incorporate large language models into workflows and applications.

Palantir's distinctive software architecture, centered around an ontology - a digital representation of an organization's data, processes, and assets - sets it apart from competitors. CTO Shyam Sankar states, "Our foundational investments in ontology and infrastructure have uniquely positioned us to meet AI demand."

Palantir's Q2 financial results were robust. Customer base grew by 43% to 849, while average spend per existing customer increased by 28%. Consequently, revenue surged 48% to $1 billion, marking the eighth consecutive quarter of acceleration, and non-GAAP earnings rose 77% to $0.16 per diluted share.

There are valid reasons for optimism about the company's future momentum. Grand View Research projects AI spending to grow at 36% annually through 2030, with decision intelligence platform spending increasing at 15% annually over the same period. This suggests Palantir could maintain annual sales growth exceeding 20% through the end of the decade.

However, Palantir faces a significant valuation challenge. Its price-to-sales ratio of 115 makes it the most expensive stock in the S&P 500 by far. No other company in the index trades above 30 times sales, meaning Palantir could drop 70% and still be the priciest stock. Given this context, a substantial correction in Palantir's stock price is not out of the question.

CoreWeave: Potential 59% Downside

CoreWeave provides cloud infrastructure and software services specifically designed for AI workloads. While traditional data centers may lose up to 65% of GPU compute capacity due to system inefficiencies, CoreWeave's GPU clusters deliver up to 20% better performance than alternative cloud services.

The company's Q2 financial results were mixed. Revenue increased by 207% to $1.2 billion, and non-GAAP operating income rose 135% to $200 million. CoreWeave also reported an 86% jump in its revenue backlog, attributed to expanded deals with an unnamed hyperscale company and OpenAI. However, its non-GAAP net loss widened to $131 million, significantly higher than the $5 million loss reported in the previous year.

The discrepancy between non-GAAP operating income and non-GAAP net income is primarily due to interest payments. Operating data centers, especially those filled with AI systems, is costly. CoreWeave has taken on substantial debt to build its infrastructure, with interest expenses totaling $267 million in Q2.

However, the company approaches borrowing responsibly. CoreWeave only takes on debt when signed contracts necessitate additional infrastructure, and only if the contract more than covers the entire cost of the debt. Nevertheless, interest payments pose such a significant challenge that the company is unlikely to turn a profit until 2027, suggesting potential stock volatility.

CoreWeave currently trades at 10 times sales, a relatively reasonable valuation for a company whose revenue is projected to grow at 127% annually through 2026. Given this context, a 59% decline seems unlikely. In fact, investors comfortable with volatility might consider adding some shares to their portfolio.