Three years after the launch of OpenAI's ChatGPT, the generative AI hype cycle is getting long in the tooth as investors grow impatient with the lack of value being created on the software side of the industry.
Artificial intelligence (AI)-related tech companies like Palantir Technologies (PLTR 1.29%) and Tesla (TSLA -4.79%) are now struggling to justify their optimistic valuations. They also face the unraveling of political hype, which boosted their stocks after Trump's election victory in November. Let's discuss some reasons why these stocks aren't worth buying on the dip.
1. Palantir Technologies
Palantir's bull thesis is losing steam, with shares down 36% -- at the time of this writing -- from their all-time high of $125 reached in mid-February. The company's shares boomed after it integrated AI large language models (LLMs) into its data analytics platforms, while Trump's election victory generated additional hype. However, both catalysts are turning into disappointments.
NASDAQ: PLTR
Key Data Points
While Palantir's co-founder Peter Thiel is a public backer of Trump and his vice president, JD Vance, it is unclear how this will lead to tangible benefits for Palantir. On the contrary, some of the new administration's goals (such as reducing the Pentagon budget by 8% annually) could actually shrink the market for Palantir's services. Government clients made up around 42% of its revenue in full-year 2024.
Palantir's AI pivot is also not as transformational as the market seemed to expect. While company sales grew 47% in 2020 (two years before OpenAI's ChatGPT brought generative AI to the mainstream), its growth rate has fallen to just 29% in 2024. While this isn't a horrible growth rate, it doesn't justify the company's price-to-earnings (P/E) multiple of 419.
The company's profitability is also under pressure from massive stock-based compensation expenses, which totaled $281.8 million in the fourth quarter. That's 74% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
2. Tesla
Like Palantir, Tesla's stock price has boomed in response to generative AI and Trump's election victory. However, while Tesla's CEO, Elon Musk, plays a role in the new administration, investors may have underestimated the negative impact political involvement is having on his company.
NASDAQ: PLTR
Key Data Points
According to analysts at JPMorgan, Tesla has experienced unprecedented reputational damage. And this trend is having a noticeable impact on sales, especially in European countries like Germany, where February sales plunged 76% compared to the prior-year period (to 1,429 vehicles sold).
That said, if there is any silver lining to the situation, individual European countries are not that important to Tesla's overall business. And Musk could use his political influence to ease tensions in the world's largest EV market, China, where potential anti-U.S. sentiment could have a much more significant impact on operational performance. In 2024, Tesla sold more than 657,000 units in China. And Musk will need to shore up this business in the face of rising competition from domestic rivals.
Image source: Getty Images.
With a P/E multiple of 118, Tesla's valuation seems too high, considering its slowing sales, reputational damage, and other challenges in its international markets. A pivot to AI and self-driving cars could eventually help the company diversify outside the automotive industry. But until that happens, investors should stay far away from the stock.
Which stock has a better chance of recovery?
Palantir and Tesla are both overvalued stocks that look poised for continued downside. But between the two, Palantir looks more likely to crash because of its higher level of overvaluation.
While Tesla also faces intense near-term challenges, its self-driving technology could eventually unlock new revenue streams in software and services. While investors should stay away from Tesla stock now, they should keep the company on their watch list pending more information about these potential long-term growth drivers.
