For the better part of the last three decades, investors have consistently had a game-changing innovation to latch onto. Since late 2022, no trend has shone brighter on Wall Street than artificial intelligence (AI).
Empowering software and systems with AI gives these systems the ability to reason and make split-second decisions without the assistance of humans. More importantly, incorporating machine learning provides a pathway for software and systems to evolve and learn new skillsets.
The scope of AI's reach is bound only by the imagination. However, the analysts at PwC pegged its global addressable market at a whopping $15.7 trillion by 2030 in Sizing the Prize. Figures this massive are bound to attract a crowd.
Image source: Getty Images.
But history also teaches investors that not every public company involved in a next-big-thing trend is necessarily worth buying. Though Wall Street analysts share a generally positive view on artificial intelligence stocks, there are some dissenting opinions.
What follows are three high-flying AI stocks that are expected to lose between 65% and 92% of their value, according to select Wall Street analysts.
Tesla: Implied downside of 92%
The artificial intelligence stock with truly staggering downside potential, based on the prognostication of one analyst, is electric-vehicle (EV) manufacturer Tesla(NASDAQ: TSLA).
Longtime Tesla bear and GLJ Research founder Gordon Johnson foresees North America's leading EV maker declining to $24.86 per share. This oddly specific price target was arrived at by Johnson placing a forward-earnings multiple of 15 on shares of Tesla and applying a 9% discount rate to what was then the current share price when issuing his price target.
Johnson has previously shared a number of concerns about Tesla, including the rise of global EV competition eating into its bottom line, as well as declining deliveries. Tesla has slashed the price on its fleet (Model's 3, S, X, and Y) on numerous occasions to combat rising inventory and account for more tepid EV demand.
But there are far more headwinds than even Johnson has outlined.
For one, Tesla's earnings quality is questionable, at best. Though it's been profitable for five consecutive years, well over half of its pre-tax income originates from automotive regulatory credits given to it for free by federal governments and interest income earned on its cash. You'd assume the bulk of its profits are coming from its first-mover EV advantages or its energy and storage segment, but the reality is that Tesla is generating most of its pre-tax income from unsustainable and non-innovative sources.
Tesla has an Elon Musk problem, as well. While Tesla CEO Musk has been pivotal in bringing new EV models to market and has helped diversify Tesla's operations, he's also a polarizing figure that's turned some consumers off of the brand. Further, many of Musk's innovative promises haven't lived up to the hype. Previous promises of robotaxis on American roadways and Level 5 autonomy being "one year away" haven't come to fruition, but are somehow baked into Tesla's share price.
Tesla's valuation is an eyesore, too. An auto stock that's on track to deliver virtually no sales growth in 2025 probably shouldn't be valued at 156 times forecast earnings per share this year.
Image source: Getty Images.
Palantir Technologies: Implied downside of 66%
Another high-flying AI stock that at least one Wall Street analyst believes will face-plant in the not-too-distant future is data-mining specialist Palantir Technologies(NASDAQ: PLTR).
RBC Capital Markets' Rishi Jaluria has been bearish on Palantir for quite some time. Jaluria, who had an $11 price target on Palantir stock as recently as four months ago, still anticipates it'll fall back to $40 per share, which would represent downside of 66%.
Specifically, Jaluria has homed in on Palantir's unjustifiable valuation premium, which is a point I wholeheartedly agree with.
On one hand, Palantir's AI-driven Gotham software-as-a-service platform isn't duplicable. Public companies that have no one-for-one replacement typically command healthy valuation premiums. I don't deny that Palantir deserves some level of premium for its steady double-digit sales growth or having the U.S. government as a core client.
The issue is that its stock peaked at north of 100 times sales in recent weeks. Over the last three decades, companies on the leading edge of a next-big-thing innovation have peaked at price-to-sales (P/S) ratios ranging from 31 to 43. No megacap stock has been able to sustain a P/S ratio of 30 over the long run, let alone a P/S ratio near 100!
Palantir Technologies' profit-driving Gotham segment is also constrained by a narrow client pool. Though the U.S. government is an excellent customer to have, the fact is that Gotham's AI platform isn't something China, Russia, or most countries for that matter, can have access to. Gotham's reasonably low long-term ceiling further clamps down on Palantir's outlandish valuation premium.
Upstart Holdings: Implied downside of 65%
The third high-flying AI stock that one Wall Street analyst believes will come crashing back to Earth is AI- and cloud-based lending platform Upstart Holdings(NASDAQ: UPST).
According to analyst Michael Ng at Goldman Sachs, one of the hottest stocks since the COVID-19 pandemic is going to retrace to $16.50 per share from its closing price of more than $47 on May 9. If Ng is accurate, Upstart shareholders would lose 65% of their existing investment.
On paper, Upstart offers a very intriguing lending model. Whereas the traditional loan-vetting process requires a seemingly endless pile of paperwork and can take days, if not weeks, to yield an answer, Upstart's entirely online process, which incorporates machine learning, can often yield immediate approvals. Banks and credit unions willing to lean on Upstart's platform can potentially reduce their costs and increase their lending pool without worsening their respective credit-risk profile.
The problem for Upstart is that the real world doesn't always work out as things are designed on paper.
One of Upstart's biggest problems is that its operating model hasn't been tested through an organic recession (i.e., one that didn't involve a pandemic). Consumers and businesses typically pare back their borrowing during recessions, while delinquency rates on outstanding loans rise. It's not yet clear if Upstart's operating model is geared to survive a U.S. recession.
Upstart is also highly sensitive to monetary policy shifts and changes in Treasury bond yields. When interest rates are falling, consumers are often more willing to borrow. Though the Federal Reserve is currently in the midst of a rate-easing cycle, Treasury bond yields spiked at their fastest pace in decades in April. Near-term economic uncertainty, coupled with the prospect of higher borrowing rates, paints a potentially worrisome picture for Upstart.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Palantir Technologies, Tesla, and Upstart. The Motley Fool has a disclosure policy.
