The bulls have been in firm control on Wall Street since the bear market bottomed out in October 2022. Last year, the ageless Dow Jones Industrial Average, benchmark S&P 500, and growth-driven Nasdaq Composite all galloped to numerous record-closing highs.
While the stock market has been propelled by a number of catalysts, including better-than-expected earnings, a dovish shift from the Fed, stock-split euphoria, and Donald Trump’s November victory, nothing has been more important than the rise of artificial intelligence (AI).
Artificial intelligence affords software and systems the ability to become more efficient at their assigned tasks, as well as evolve to learn new skills, all without human intervention. The capacity to learn and evolve gives AI virtually limitless utility, as well as a $15.7 trillion addressable market by 2030, according to the analysts at PwC.
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However, history has repeatedly shown investors that not every company involved in a next-big-thing trend turns out to be a winner -- and this is a fact not lost on Wall Street analysts.
While one Wall Street analyst believes a leading AI hardware provider will soar by up to 115% in 2025, another analyst expects a high-flying and irreplaceable AI stock will face-plant in the new year and lose up to 84% of its value.
This beaten-down AI stock can more than double in 2025
Despite hitting a 52-week low on Jan. 10, semiconductor giant Advanced Micro Devices (AMD -4.76%) is viewed as one of the top stocks to buy in the first-half of 2025 by analyst Hans Mosesmann of Rosenblatt Securities. The $250 price target Mosesmann has placed on AMD would equate to a 115% increase from where shares of the company ended last week.
In a December note to his clients, Mosesmann laid out a few key reasons he believes AMD is ideally positioned for a bounce-back year.
To begin with, Mosesmann anticipates AMD will (pardon the pun) chip away at Intel’s leading share in central processing units (CPUs). Although CPUs aren’t the growth story they once were, an expected rebound in laptop/desktop sales in 2025 should lead to improved results for the top CPU companies, which includes Intel and AMD.
Based on data from Mercury Research, AMD accounted for a 28.7% share of the desktop processor market during the third quarter of 2024, which is up 8.5 percentage points from the year-ago period. The margins and cash flow associated with CPUs are still robust enough to make a positive impact on AMD’s bottom line.
Mosesmann is also looking for Advanced Micro Devices to siphon graphics processing unit (GPU) share away from AI data-center kingpin Nvidia (NVDA -3.00%).
On one hand, Nvidia’s Hopper (H100) GPU and next-generation Blackwell GPU architecture are pretty much unrivaled in terms of computing speed. It’s why Nvidia has such an extensive backlog of orders and has enjoyed otherworldly pricing power for its hardware.
On the other hand, AMD’s Instinct-series GPUs offer a considerably more appealing price point than Nvidia’s chips. Perhaps more importantly, AMD’s hardware should be easier for businesses to get their hands on. Companies wanting to be on the leading edge of the AI revolution may opt for AMD’s chips to avoid having to wait in line for Nvidia’s Hopper or Blackwell chips.
With AMD stock valued at less than 23 times forward-year earnings, there is potential for significant fundamentally-driven upside in 2025. But if the AI bubble were to burst, as history suggests will happen, AMD’s top growth-driver would disappear.
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This irreplaceable AI stock could plunge 84% in the new year
At the other end of the spectrum, analyst Rishi Jaluria at RBC Capital Markets foresees the hottest AI stock of 2024, Palantir Technologies (PLTR -1.42%), falling back to $11 per share. This would imply downside of up to 84% in the new year.
Despite a rough start to the year for Palantir (its shares are down 11%, as of the closing bell on Jan. 10), its stock has gained 934% over the trailing-two-year period. This outsized return is a reflection of Palantir’s unique role as an AI-driven data-mining specialist, as well as its improved operating performance.
What makes Palantir “unique” is its operating moat. Its AI-inspired Gotham platform is used by the U.S. government and select allies to gather and analyze sensitive data, as well as plan and execute missions. Meanwhile, Foundry is Palantir’s enterprise-facing platform that utilizes AI and machine learning solutions to help businesses make sense of their data. There simply isn’t a one-for-one replacement for the software-as-a-service solutions Palantir provides at scale, which has afforded the company a hefty valuation premium.
Palantir’s operating results have also fueled the parabolic move higher in its stock. Rapid sales growth from Foundry, coupled with a re-acceleration of sales growth from Gotham, helped shift Palantir to recurring profits ahead of Wall Street’s consensus expectations.
However, Jaluria has two specific reasons he remains skeptical of Palantir.
For starters, he’s unsure if Palantir can keep up its breakneck sales growth. In particular, Jaluria believes the company’s earnings strength was influenced by the timing of select government contracts and points to potentially slower growth from Foundry.
Something to keep in mind about Gotham is that its long-term growth ceiling is naturally limited. Palantir’s management is willing to allow the U.S. and its allies access to its platform, while most other countries are shut out. This ultimately limits the scope of Gotham’s reach.
Jaluria is also concerned about Palantir’s astronomical valuation. Whereas leaders of the dot-com bubble topped out around 40 times sales, and Nvidia peaked just north of 40 times sales in June-July 2024, Palantir is still valued at 61 times trailing-12-month sales. History tells us this isn’t a sustainable premium, no matter how fast Palantir Technologies is growing.
Although 84% downside would be a bit extreme for a profitable company with a sustainable moat, I do somewhat agree with Jaluria that Palantir stock should meaningfully retrace in the new year.
