In October, Wall Street celebrated its second year (and counting) in a resounding bull market. While a confluence of factors is responsible for lifting the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to multiple record-closing highs last year, none played a bigger role than the rise of artificial intelligence (AI).
AI gives software and systems the ability to make split-second decisions without the need for human input or intervention. It’s a technology that has wide-reaching utility in virtually all industries around the globe.
Image source: Getty Images.
But as we’ve seen from other game-changing technologies and innovations over the last couple of decades, not all early-stage risers are necessarily long-term winners. The wide variance observed in price targets for artificial intelligence stocks on Wall Street speaks to this mixed outlook.
Based on low-water price targets issued by select Wall Street analysts, the following three premier AI stocks are expected to plunge by up to 86% in the new year.
Super Micro Computer: Implied downside of 55%
The first rapidly-growing AI stock that at least one Wall Street analyst believes will plummet in 2025 is customizable rack server and storage solutions company Super Micro Computer (SMCI 10.91%). According to Mehdi Hosseini or Susquehanna, Supermicro stock is headed for $15 per share, which would equate to a whopping 55% decline, relative to where shares closed on Jan. 3.
On paper, Supermicro finds itself ideally positioned to take advantage of the AI revolution. Companies are paying big bucks for the data center infrastructure necessary to make split-second decisions, run generative AI solutions, and build/train large language models. In fiscal 2024, Supermicro’s net sales surged by 110% to nearly $15 billion.
To add fuel to the fire, Super Micro Computer utilizes Nvidia’s ultra-popular graphics processing units (GPUs) in its rack servers. With Nvidia’s chips possessing superior computing speed, it’s made SuperMicro’s servers even more desirable.
But as you can guess from Hosseini’s price target, things haven’t gone as planned. In late August, Super Micro Computer was the subject of a research report from noted short-seller Hindenburg Research, which alleged, among other things, “accounting manipulation.” Since this report, the company has:
- Delayed the filing of its annual report.
- Had an early-stage probe commenced by federal regulators regarding its accounting practices, per The Wall Street Journal.
- Had Ernst & Young resign as the company’s auditor.
If there’s a break in the clouds for Supermicro, it’s that an independent special committee found no evidence of misconduct by management and expected no restatement of the company’s previous financials. Nevertheless, nothing is concrete until the company’s new auditor signs off on its financial statements and the company files its annual report with the Securities and Exchange Commission.
With competition in data center infrastructure picking up, a wait-and-see approach seems prudent with Super Micro Computer.
Image source: Getty Images.
Palantir Technologies: Implied downside of 86%
A second premier AI stock that may reverse course in the new year is cloud-based data-mining specialist Palantir Technologies (PLTR 6.25%). Though Palantir stock has gained 1,140% over the trailing two years, RBC Capital analyst Rishi Jaluria sees the company’s shares retracing to $11, which represents potential downside of 86% in 2025.
Palantir’s nearly parabolic climb over the last two years is a reflection of its operating model being unique. The company’s AI-inspired Gotham platform, which helps federal governments gather data and plan missions, and AI/machine learning-driven Foundry platform, which makes sense of big data for businesses, have no one-for-one replacements at scale. This means Palantir’s operating cash flow is safe and highly predictable.
In addition to Palantir’s irreplaceability, investors also appreciate the company’s shift to recurring profitability well ahead of schedule. The multiyear contracts earned from the U.S. government have helped sustain double-digit sales growth and decisively pushed Palantir into the profit column.
However, maintaining its breakneck stock gains may prove challenging. To begin with, the long-term growth runway for Gotham has a built-in ceiling. Palantir’s management team isn’t going to allow China, Russia, and other non-allies of the U.S. to access its intuitive platform.
Perhaps the bigger issue for Palantir, which is a clear concern raised by Jaluria, is the company’s valuation. Throughout history, companies on the leading edge of next-big-thing innovations have often topped out with a price-to-sales (P/S) ratio of 30 to 40. Palantir has a P/S ratio of nearly 73 at the moment. While a premium valuation is warranted given the company’s irreplaceability, no company has been able to sustain a valuation this lofty.
Though an 86% decline, as Jaluria has forecast, seems a bit excessive for a company sporting sustained double-digit growth, a significant correction wouldn’t be a surprise.
SoundHound AI: Implied downside of 66%
The third premier AI stock that can plunge in the new year, based on the price forecast of one Wall Street analyst, is AI voice recognition and conversational technologies specialist SoundHound AI (SOUN 2.28%). Ladenburg Thalmann analyst Glenn Mattson foresees shares of SoundHound retracing from north of $20 to just $7 in 2025, which would represent a decline of 66%.
Similar to Palantir, SoundHound AI’s stock has gone virtually parabolic in recent months. The wind in SoundHound’s sails has to do with its position in the next stage of AI’s evolution. The rise of AI agents is expected to be the hottest trend for artificial intelligence this year. SoundHound envisions a world where AI voice integration and intuitive commands can unify voice ecosystems.
The company is currently growing like a weed, with reported sales climbing 89% in the third quarter from the prior-year period, and the company’s largest customer accounting for only 12% of net sales, down from 72%. This signals that SoundHound’s push into new verticals, as well as landing new clients, is helping to diversify and strengthen its revenue stream.
On the other hand, SoundHound Ai isn’t profitable, and it’s burning through quite a bit of cash as it expands into new verticals. Through the first nine months of 2024, more than $75.7 million in cash was used in operating activities. Even with sales expected to potentially double in 2025, the company’s cash burn and operating losses are likely to continue.
SoundHound’s valuation is also concerning. Though traditional fundamental metrics like the price-to-earnings (P/E) ratio don’t work with early-stage businesses, SoundHound’s P/S ratio of 94 points to an unsustainable recent climb in its share price.
Lastly, history has been unkind to next-big-thing innovations for three decades. Investors have consistently overestimated the adoption rate and early-stage utility of new technologies, which has eventually led to a bubble-bursting event. While this doesn’t mean AI won’t be an eventual game changer, it does imply that every innovation needs time to mature -- even artificial intelligence. If the AI rally fades, companies valued a hefty premium, like SoundHound AI, could take it on the chin.
