Not all high-growth stocks translate into long-term success.
In October, Wall Street celebrated its second year (and counting) of a bull market. While several factors contributed to propelling the Dow Jones Industrial Averagethe S&P 500 and the Nasdaq Composite at record levels last year, none has had as significant an impact as the rise of artificial intelligence (AI).
AI provides software and systems with the ability to make split-second decisions without human intervention. This technology finds application in almost all sectors globally.
Source de l’image : Getty Images.
However, as other revolutionary technologies over the past two decades have shown, not every hotly rising stock will necessarily succeed in sustaining itself over time. The wide variability in price forecasts for AI-related stocks on Wall Street attests to this mixed outlook.
Based on the lowest forecasts provided by some Wall Street analysts, three top AI stocks could decline as much as 86% over the next year.
Super Micro Computer: an implied drop of 55%
The first high-growth AI stock that could collapse, according to at least one Wall Street analyst, is the company Super Micro Computer (SMCI -6.50%)specializing in customizable rack servers and storage solutions. Susquehanna analyst Mehdi Hosseini predicts Supermicro stock will hit $15, which would represent an impressive 55% drop from its Jan. 3 closing price.
On paper, Supermicro seems ideally positioned to benefit from the AI revolution. Companies are investing heavily in the data center infrastructure needed to make instant decisions and develop complex language models. For fiscal 2024, Supermicro’s net sales jumped 110%, reaching nearly $15 billion.
Add to this that Super Micro Computer uses graphics processing units (Nvidia) ultra-popular in its servers. Thanks to the superior computing speed of Nvidia chips, Supermicro servers are even more popular.
However, as Hosseini’s prediction indicates, things did not go as planned. In late August, Super Micro Computer was the subject of a research report from short-selling broker Hindenburg Research, which alleged, among other things, “accounting manipulation.” Following this report, the company:
The silver lining for Supermicro is that an independent special committee has found no evidence of management misconduct and is not planning a restatement of past financial statements. However, no certainty can be acquired until the company’s new auditor has validated its financial statements.
With increasing competition in data center infrastructure, a wait-and-see approach seems prudent for Super Micro Computer.
Source de l’image : Getty Images.
Palantir Technologies: an implied decline of 86%
Another top AI stock that could turn around in the new year is the cloud-based data mining company Palantir Technologies (PLTR -7.94%). Although Palantir stock has soared 1,140% over the past two years, analyst Rishi Jaluria of RBC Capital predicts the company’s shares could return to $11, representing an 86% downside potential in 2025 .
Palantir’s near exponential growth over the past two years is a reflection of its unique operating model. The AI-inspired Gotham platform helps federal governments collect data and plan missions, while the AI and machine learning-driven Foundry platform helps businesses make sense of large amounts of data . This means Palantir’s operating cash flow is protected and highly predictable.
Additionally, investors like the company’s early move to recurring profitability. The multi-year contracts obtained from the US government helped sustain double-digit sales growth and bring Palantir into the camp of profitable companies.
However, maintaining its meteoric stock market gains will be a challenge. First of all, it should be noted that the long-term growth outlook for the Gotham platform is limited. Palantir management does not plan to let China, Russia and other countries not allied with the United States access its intuitive platform.
Another major issue for Palantir, which Jaluria clearly highlights, concerns the company’s valuation. Historically, companies at the forefront of disruptive innovations often achieve a price-to-sales (P/S) ratio of 30 to 40. Currently, Palantir trades at a P/S of around 73. Although a higher valuation is justified given its irreplaceable nature, no company has been able to sustain such a high valuation.
Although an 86% drop, as predicted by Jaluria, seems excessive for a company with sustained double-digit growth, a significant correction would not be surprising.
SoundHound AI: an implied drop of 66%
The third AI stock that could fall next year, according to a Wall Street analyst’s forecast, is the speech recognition and conversation technology specialist SoundHound AI (SOUN -9.40%). Analyst Glenn Mattson of Ladenburg Thalmann predicts that SoundHound shares could fall from more than $20 to just $7 in 2025, which would represent a 66% decline.
Like Palantir, SoundHound’s stock has experienced almost exponential growth in recent months. The tailwind for SoundHound comes from its position in the next phase of AI evolution. The emergence of AI agents is expected to be the leading trend in artificial intelligence this year. SoundHound envisions a world where AI voice integration and intuitive controls can unify voice ecosystems.
The company is growing rapidly, with sales increasing 89% in the third quarter from a year earlier, and its largest customer accounting for just 12% of net sales, down from 72%. This indicates that SoundHound’s expansion into new sectors and acquisition of new customers is helping to diversify and strengthen its revenue.
However, SoundHound AI is not yet profitable and is consuming a lot of cash as it expands into new sectors. During the first nine months of 2024, more than $75.7 million was used in its operational activities. Even though sales are expected to potentially double by 2025, cash burn and operating losses are likely to persist.
SoundHound’s valuation also raises concerns. Although traditional fundamental metrics like the price-to-earnings (P/E) ratio aren’t entirely suitable for young companies, SoundHound’s P/S of 94 reflects an unsustainable recent rise in its stock price.
Finally, history has not been kind to the predictable innovations over the past three decades. Investors routinely overestimated the pace of adoption and utility of new technologies, ultimately leading to bubble bursts. While this does not imply that AI will not be a future game changer, it does imply that every innovation requires time to mature, even artificial intelligence. If the AI craze fizzles, overvalued companies like SoundHound AI could suffer.
In sum, as AI continues to transform many industries, it is essential to consider not only the potential of these technologies, but also the soundness of management and reasonable valuation. The question arises: how far will this AI bubble grow before it requires adjustment? Investors will therefore need to remain vigilant and exercise discernment in the face of the uncertain future of this area.
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