Artificial Intelligence Stocks to Reconsider Selling: Expected Declines of 74% and 30%, Predicted by Certain Wall Street Experts
In the rapidly evolving tech landscape, two companies – Palantir Technologies and CrowdStrike – have been making waves with their impressive growth and focus on artificial intelligence (AI). However, concerns about their high valuations have been raised by Wall Street analysts, casting a shadow over their future prospects.
Palantir Technologies exhibited a remarkable performance in the first quarter, with an adjusted operating margin of 44%, up from 36% in the same period last year. The company's U.S. commercial revenue surged by 71%, and its market cap now exceeds $350 billion. Despite these impressive figures, the stock trades at high multiples, such as 228 times forward earnings and 78 times revenue expectations over the next 12 months. These valuation levels are difficult to justify compared to peer companies, and absent a substantial "beat-and-raise" quarter that significantly improves growth prospects in the near term, these multiples raise concerns about possible downside.
CrowdStrike, on the other hand, has seen a 352% increase in share price since the start of 2023. The cybersecurity firm's market cap is nearly $120 billion, and it trades at a price-to-sales ratio of 22 times revenue expectations over the next 12 months. Forty-eight percent of CrowdStrike's customers now use at least six of its modules, and its annually recurring revenue climbed 20% in the first quarter, exceeding its guidance. However, the stock has faced several analyst downgrades recently, with the lowest price target among analysts at $350, implying a 26% potential downside.
The potential downside in the stocks of both companies mainly stems from concerns about their high valuations, which may not be sustainable despite strong growth fundamentals. While it's possible that CrowdStrike continues to climb higher, it might be worth considering taking profits and finding better values in the market.
Palantir Technologies' CEO Alex Karp has put most of the company's manpower into building a better product, with the idea that a better product will do the selling for itself. Meanwhile, CrowdStrike is leveraging AI on its platform with agentic AI capabilities through its new Charlotte platform.
Interestingly, the number of S&P 500 companies mentioning "AI" on their earnings call has climbed significantly, from less than 75 in 2022 to 241 during the first quarter of this year, according to FactSet Insight, reflecting the growing importance of AI in the corporate world.
In conclusion, while both companies benefit from robust growth, AI tailwinds, and expanding enterprise demand, the key reason for the potential downside is the high valuation multiples priced into their stocks. Analysts fear that if the companies fail to deliver exceptional growth exceeding current expectations in upcoming quarters, these multiples could lead to a correction in the stock prices. It's a reminder that while growth is important, it's equally crucial to consider valuation when investing in stocks.
Investing in both Palantir Technologies and CrowdStrike involves a high risk due to their lofty valuations, which analysts believe might not be sustainable despite their impressive growth. The high price-to-earnings and price-to-sales ratios of these stocks could lead to a potential downside if they fail to deliver extraordinary growth in the coming quarters.
The tech landscape is showcasing a growing focus on artificial intelligence (AI), as evidenced by the increasing number of S&P 500 companies mentioning AI in their earnings calls, reflecting its importance in the corporate world.
Palantir Technologies' CEO Alex Karp is concentrating on developing a superior product, while CrowdStrike is utilizing AI to enhance its platform through its new Charlotte project.
It is essential to balance growth potential with valuation when deciding to invest in stocks, as demonstrated by the high valuation multiples of Palantir Technologies and CrowdStrike, which pose a significant risk in the stock market.
