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Yahoo
16 hours ago
- Business
- Yahoo
Prediction: Palantir Stock Will Plunge to $55 by 2027
Productivity improvements and consumption-side effects from the rise of artificial intelligence (AI) can add $15.7 trillion to the global economy come 2030, according to one estimate. Investors have flocked to Palantir Technologies stock due to its sustained moat, cash-rich balance sheet, and ideal positioning with Donald Trump as president.. However, two historically insurmountable catalysts are expected to weigh heavily on Palantir stock in the coming years. 10 stocks we like better than Palantir Technologies › For more than two years, no trend has captivated the attention and pocketbooks of investors quite like the rise of artificial intelligence (AI). The ability for AI-empowered software and systems to make split-second decisions without the oversight of humans is a technology with broad-reaching potential in most industries around the globe. In Sizing the Prize, the analysts at PwC estimate a combination of productivity improvements and consumption-side effects from AI will boost worldwide gross domestic product by 26%, or $15.7 trillion, come 2030. If this figure is even remotely accurate, it means a long list of companies will benefit from this game-changing technology. Although graphics processing unit (GPU) kingpin Nvidia is often viewed as the face of the AI revolution, a strong argument can be made that it's been surpassed by AI- and machine learning-driven data-mining specialist Palantir Technologies (NASDAQ: PLTR). When 2023 began, Palantir was a company of fringe importance in the tech sector. But following a greater than 2,000% gain in two and a half years, it's become the eighth-largest publicly traded U.S. tech stock. But in spite of everything seemingly going its way, it's my expectation that Palantir stock will plunge to $55 (representing a decline of 60%), at minimum, by 2027. However, before making predictions about the future, it's imperative to understand how Palantir's $330 billion market cap foundation was built. The primary reason Wall Street and investors love Palantir so much is simple: it offers a sustainable moat. The company's two core operating segments -- Gotham and Foundry -- lack large-scale competition. When public companies have no clear one-for-one replacement and don't have to look over their proverbial shoulder, they tend to be rewarded with a hefty premium by the investing community. Something else Palantir brings to the table that investors seem to appreciate is its operating cash flow predictability. Gotham, which services federal governments by aiding with mission planning and execution, as well as data collection/analysis, typically lands multiyear contracts. Meanwhile, the enterprise-focused Foundry platform, which helps businesses better understand their data, is a subscription-based model. Wall Street loves predictability, and a lot of Palantir's sales can be forecast multiple years in advance. Speaking of forecasting, Palantir shifted to recurring profits well ahead of the consensus from Wall Street analysts. The company has demonstrated that its operating model is viable and time-tested. Another reason investors have piled in is the company's pristine balance sheet. Palantir Technologies closed out the March-ended quarter with $5.43 billion in cash, cash equivalents, and marketable securities, with no debt. This mammoth cash pile allows CEO Alex Karp to aggressively invest in platform innovation(s), as well as reward shareholders with occasional stock buybacks. The icing on the cake for Wall Street and investors -- aside from Palantir's sustained annual sales growth of between 25% and 35% -- is Donald Trump's November victory. Historically, Republican-led governments have favored strong defense spending. Further, Trump is a big proponent of national security and making America an AI leader. It's the ideal situation for Gotham (Palantir's leading platform) to thrive. When viewed with a wide lens, Palantir is a fantastic business with a sustainable moat that's utilizing AI and machine learning to sustain a double-digit sales growth rate. But even fantastic businesses can run into historical headwinds. While I don't deny that Palantir is cash-rich, profitable, and capable of sustaining its competitive moat, its premium valuation will almost certainly come under pressure over the next two years due to two factors. To begin with, there hasn't been a game-changing technological innovation or hyped trend for more than three decades that's managed to avoid an early stage bubble-bursting event. In other words, every major technological advancement since (and including) the advent of the internet in the mid-1990s has seen investors overestimate early innings adoption and/or utility. There's no question America's most-influential businesses have an appetite for AI hardware and applications at the moment. Nvidia's skyrocketing sales are evidence of businesses wanting to be on the leading edge of the AI revolution within their respective industries. But what we're not seeing is evidence of businesses optimizing their AI solutions or consistently generating a positive return on their AI investments. Without exception, every next-big-thing technology has needed time to mature, and AI simply isn't there yet. The good news for Palantir is its multiyear contracts via Gotham and subscriptions from Foundry would help insulate its top-line results from an immediate drop-off if the AI bubble bursts. Unfortunately, investor sentiment would still be expected to weigh heavily on Palantir stock, if history were to repeat. The second significant downside catalyst for Palantir stock, based on what history has to say, is its valuation. Although a premium valuation multiple is warranted for companies that boast a sustainable moat, Palantir stock has pushed this premium into the stratosphere. Prior to the bursting of the dot-com bubble a quarter of a century ago, prominent internet-driven businesses like Microsoft, Cisco Systems, and Amazon saw their respective price-to-sales (P/S) ratios catapult higher. Something similar occurred with AI-GPU giant Nvidia last summer. Though their trailing-12-month (TTM) P/S ratio peaks all occurred at different times, these four companies topped out at TTM P/S ratios ranging from about 30 to 43. As of the closing bell on June 20, Palantir's TTM P/S ratio was tipping the scales at (drum roll) 110! No megacap company on the leading edge of a next-big-thing trend has been able to maintain a TTM P/S ratio of 30 to 40 for a considerable length of time, let alone a triple-digit figure. Even if Palantir were to meet Wall Street's consensus forecast, which calls for cumulative sales growth of 132% from 2024 ($2.87 billion, actual) to 2027 ($6.65 billion, estimated), it would still be valued at a well-above-average multiple of 20 times sales in 2027 at $55 per share. Though it's impossible to pinpoint when the music will slow or stop for Palantir, history couldn't be clearer that a big-time decline is in order. Before you buy stock in Palantir Technologies, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Palantir Technologies wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $664,089!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $881,731!* Now, it's worth noting Stock Advisor's total average return is 994% — a market-crushing outperformance compared to 172% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 23, 2025 John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. Prediction: Palantir Stock Will Plunge to $55 by 2027 was originally published by The Motley Fool
Yahoo
14-06-2025
- Business
- Yahoo
Prediction: 3 Non-Tech Stocks That Can Blow Past Nvidia's Market Cap by 2035
Artificial intelligence (AI) is an estimated $15.7 trillion global addressable market by 2030 that's captivated Wall Street's attention. Although AI stock Nvidia can seemingly do no wrong, historical precedent would beg to differ. A trio of companies outside the tech sector have the tools and intangibles needed to leapfrog Nvidia's valuation over the next decade. 10 stocks we like better than Nvidia › For more than two years, the evolution of artificial intelligence (AI) has dominated the investment landscape. The capacity for AI-empowered software and systems to make split-second decisions without the aid of humans is a technology that can provide operating efficiencies throughout most industries around the globe. In Sizing the Prize, the analysts at PwC pegged this global addressable market for AI at $15.7 trillion by the turn of the decade. Even if this estimate is just somewhat in the ballpark, it points to a game-changing trend that can positively impact a long list of businesses. However, no company has more directly benefited from the rise of artificial intelligence than Nvidia (NASDAQ: NVDA). It took less than two years for Nvidia's market cap to catapult by more than $3 trillion, and for it to, briefly, become the most valuable publicly traded company. While it would appear that nothing can go wrong for Nvidia, historical precedent would beg to differ. A decade from now, Nvidia stock coming back to Earth, coupled with steady growth from other magnificent businesses, can lead to three non-tech stocks blowing past Wall Street's AI darling in the market cap column. Let me preface this discussion by giving Nvidia credit where credit is due. Its Hopper graphics processing units (GPUs) and successor Blackwell GPU architecture account for the lion's share of GPUs deployed in enterprise AI-accelerated data centers. It's a testament that Nvidia is producing a superior product that's clearly outpacing its direct external rivals in compute potential. Nvidia also took advantage of economic scarcity. With demand for AI GPUs handily outpacing their supply, and world-leading chip fabrication company Taiwan Semiconductor Manufacturing unable to expand its production capacity fast enough to satiate demand, Nvidia's hardware is commanding a 100%-plus premium to rival chips. There's a reason Nvidia's gross margin topped 70% throughout fiscal 2025 (its fiscal year ends in late January). But there's a historical headwind that's lies undefeated since the mid-1990s, and it squarely has artificial intelligence and Nvidia in its proverbial sight. Every next-big-thing technology and innovation for more than 30 years has endured a bubble-bursting event early in its expansion. In other words, investors have been consistently overestimating the adoption rate and/or utility of game-changing trends for decades -- and AI looks to be no exception. Most businesses deploying AI solutions haven't optimized them and aren't generating a positive return on their AI investments. If history rhymes once more, and an AI bubble were to form and burst, Nvidia would almost certainly be one of the biggest losers. This isn't to say Nvidia won't be wildly successful after artificial intelligence matures as a technology. Rather, it points to the historical precedent that market leaders of next-big-thing trends always falter in the early going due to the overzealousness of investors. However, the following three non-tech titans all have the tools and intangibles needed to leapfrog Nvidia's valuation over the next 10 years. Though non-tech companies tend to dominate the trillion-dollar ranks, it's Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), which seems likeliest to surpass Nvidia's market cap by 2035. Even though the Oracle of Omaha is stepping down from his role as CEO by the end of this year and handing the reins over to Greg Abel, a foundation has been laid that can sustain double-digit returns for Berkshire Hathaway's stock. One reason Berkshire stock has delivered an annualized return of almost 20% spanning 60 years is because Buffett and his team have focused on cyclical businesses. Instead of trying to time when inevitable recessions will occur, Buffett has packed his company's $280 billion investment portfolio and owned assets with businesses that can take advantage of nonlinear periods of growth. With the average U.S. recession since World War II lasting just 10 months and the typical expansion enduring for five years, Buffett and his crew simply need to exercise patience and allow time to work its magic. Warren Buffett also has a penchant for diving into dividend stocks. Companies that pay a regular dividend have historically run circles around their non-paying peers in the return column over the last half-century. Berkshire appears to be on track to collect more than $5 billion in dividend income this year alone. Don't overlook Berkshire's phenomenal buyback program, either. Despite Buffett going cold turkey on share repurchases for three consecutive quarters, he spent close to $78 billion, in aggregate, buying back his own company's stock from July 1, 2018 to June 30, 2024. These buybacks have helped to boost Berkshire's earnings per share and made its stock more attractive. A second non-tech stock that can blow past Nvidia's valuation over the coming 10 years is none other than payment-processing leader Visa (NYSE: V). Visa's current market cap of $715 billion places it more than $2.7 trillion behind Nvidia. One of Visa's core catalysts is shared with Berkshire Hathaway: the disproportionate nature of economic cycles. With periods of growth lasting considerably longer than downturns, Visa is able to benefit from consumers and businesses increasing their spending over time. Something else that helps set Visa apart within the financial sector is its general avoidance of lending. Though companies that choose to process payments and lend can double-dip during periods of growth, it also exposes these double dippers to credit delinquencies and loan losses during recessions and sluggish periods of economic expansion. With Visa shying away from lending, it doesn't have to worry about setting aside capital. In short, Visa bounces back from downturns quicker than most financial stocks. Arguably the biggest opportunity for Visa exists beyond domestic borders. Cross-border payment volume has been consistently growing by a double-digit percentage annually, which is reflective of how underbanked most emerging markets are. This is a company that has the cash flow and balance sheet to organically or acquisitively enter new markets and sustain a double-digit sales and earnings growth rate. The icing on the cake is that Visa dominates domestically. The roughly $6.45 trillion in credit card network purchasing volume it handled in 2023 is approximately $2.4 trillion more than its three closest competitors, combined. Visa's U.S. cash flow is rock-solid and predictable. The third non-tech stock with the tools and intangibles to fully leapfrog Nvidia's market cap by 2035 is retail powerhouse Walmart (NYSE: WMT). Walmart's $765 billion market cap leaves it about $2.7 trillion away from Nvidia as well. Walmart's easily identifiable competitive edge is its size. Its steady operating cash flow and deep pockets allow it to purchase products in bulk. When buying large quantities of goods, Walmart is able to negotiate a lower per-unit cost, which in turn allows it to undercut local stores and national grocers on price. Walmart offers a value proposition that speaks to consumers. But Walmart is also an innovator. Management has been aggressively investing in its online presence and ramping up its membership platform (Walmart+) in an effort to boost organic growth and its margins. During its fiscal first quarter (ended April 30), global e-commerce sales surged 22%, with U.S. e-commerce delivering its first quarter of profitability. Furthermore, membership income jumped by nearly 15%. Similar to Costco Wholesale's membership model, membership fees flow to the bottom line and allow Walmart to be more aggressive with its pricing on traffic-driving goods. Accepting lower margins on select groceries gets consumers in its stores or locked within its ecosystem where they can make higher-margin discretionary purchases. Lastly, and to build on the point above, Walmart provides basic need goods, such as food, toiletries, and household cleaning products. It's going to draw consumers in any economic climate, and is fully capable of generating predictable cash flow year after year. Before you buy stock in Nvidia, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Nvidia wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $655,255!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $888,780!* Now, it's worth noting Stock Advisor's total average return is 999% — a market-crushing outperformance compared to 174% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 9, 2025 Sean Williams has positions in Visa. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, Nvidia, Taiwan Semiconductor Manufacturing, Visa, and Walmart. The Motley Fool has a disclosure policy. Prediction: 3 Non-Tech Stocks That Can Blow Past Nvidia's Market Cap by 2035 was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
15-05-2025
- Business
- Yahoo
3 High-Flying Artificial Intelligence (AI) Stocks That Can Plunge Up to 92%, According to Select Wall Street Analysts
By one evaluation, artificial intelligence (AI) can boost the global economy by $15.7 trillion come 2030. Though most Wall Street analysts share a positive view on AI stocks, there are some dissenting opinions. Three of Wall Street's buzziest AI stocks can plummet 65% to 92%, if select analyst prognostications prove accurate. These 10 stocks could mint the next wave of millionaires › For the better part of the last three decades, investors have consistently had a game-changing innovation to latch onto. Since late 2022, no trend has shone brighter on Wall Street than artificial intelligence (AI). Empowering software and systems with AI gives these systems the ability to reason and make split-second decisions without the assistance of humans. More importantly, incorporating machine learning provides a pathway for software and systems to evolve and learn new skillsets. The scope of AI's reach is bound only by the imagination. However, the analysts at PwC pegged its global addressable market at a whopping $15.7 trillion by 2030 in Sizing the Prize. Figures this massive are bound to attract a crowd. But history also teaches investors that not every public company involved in a next-big-thing trend is necessarily worth buying. Though Wall Street analysts share a generally positive view on artificial intelligence stocks, there are some dissenting opinions. What follows are three high-flying AI stocks that are expected to lose between 65% and 92% of their value, according to select Wall Street analysts. The artificial intelligence stock with truly staggering downside potential, based on the prognostication of one analyst, is electric-vehicle (EV) manufacturer Tesla (NASDAQ: TSLA). Longtime Tesla bear and GLJ Research founder Gordon Johnson foresees North America's leading EV maker declining to $24.86 per share. This oddly specific price target was arrived at by Johnson placing a forward-earnings multiple of 15 on shares of Tesla and applying a 9% discount rate to what was then the current share price when issuing his price target. Johnson has previously shared a number of concerns about Tesla, including the rise of global EV competition eating into its bottom line, as well as declining deliveries. Tesla has slashed the price on its fleet (Model's 3, S, X, and Y) on numerous occasions to combat rising inventory and account for more tepid EV demand. But there are far more headwinds than even Johnson has outlined. For one, Tesla's earnings quality is questionable, at best. Though it's been profitable for five consecutive years, well over half of its pre-tax income originates from automotive regulatory credits given to it for free by federal governments and interest income earned on its cash. You'd assume the bulk of its profits are coming from its first-mover EV advantages or its energy and storage segment, but the reality is that Tesla is generating most of its pre-tax income from unsustainable and non-innovative sources. Tesla has an Elon Musk problem, as well. While Tesla CEO Musk has been pivotal in bringing new EV models to market and has helped diversify Tesla's operations, he's also a polarizing figure that's turned some consumers off of the brand. Further, many of Musk's innovative promises haven't lived up to the hype. Previous promises of robotaxis on American roadways and Level 5 autonomy being "one year away" haven't come to fruition, but are somehow baked into Tesla's share price. Tesla's valuation is an eyesore, too. An auto stock that's on track to deliver virtually no sales growth in 2025 probably shouldn't be valued at 156 times forecast earnings per share this year. Another high-flying AI stock that at least one Wall Street analyst believes will face-plant in the not-too-distant future is data-mining specialist Palantir Technologies (NASDAQ: PLTR). RBC Capital Markets' Rishi Jaluria has been bearish on Palantir for quite some time. Jaluria, who had an $11 price target on Palantir stock as recently as four months ago, still anticipates it'll fall back to $40 per share, which would represent downside of 66%. Specifically, Jaluria has homed in on Palantir's unjustifiable valuation premium, which is a point I wholeheartedly agree with. On one hand, Palantir's AI-driven Gotham software-as-a-service platform isn't duplicable. Public companies that have no one-for-one replacement typically command healthy valuation premiums. I don't deny that Palantir deserves some level of premium for its steady double-digit sales growth or having the U.S. government as a core client. The issue is that its stock peaked at north of 100 times sales in recent weeks. Over the last three decades, companies on the leading edge of a next-big-thing innovation have peaked at price-to-sales (P/S) ratios ranging from 31 to 43. No megacap stock has been able to sustain a P/S ratio of 30 over the long run, let alone a P/S ratio near 100! Palantir Technologies' profit-driving Gotham segment is also constrained by a narrow client pool. Though the U.S. government is an excellent customer to have, the fact is that Gotham's AI platform isn't something China, Russia, or most countries for that matter, can have access to. Gotham's reasonably low long-term ceiling further clamps down on Palantir's outlandish valuation premium. The third high-flying AI stock that one Wall Street analyst believes will come crashing back to Earth is AI- and cloud-based lending platform Upstart Holdings (NASDAQ: UPST). According to analyst Michael Ng at Goldman Sachs, one of the hottest stocks since the COVID-19 pandemic is going to retrace to $16.50 per share from its closing price of more than $47 on May 9. If Ng is accurate, Upstart shareholders would lose 65% of their existing investment. On paper, Upstart offers a very intriguing lending model. Whereas the traditional loan-vetting process requires a seemingly endless pile of paperwork and can take days, if not weeks, to yield an answer, Upstart's entirely online process, which incorporates machine learning, can often yield immediate approvals. Banks and credit unions willing to lean on Upstart's platform can potentially reduce their costs and increase their lending pool without worsening their respective credit-risk profile. The problem for Upstart is that the real world doesn't always work out as things are designed on paper. One of Upstart's biggest problems is that its operating model hasn't been tested through an organic recession (i.e., one that didn't involve a pandemic). Consumers and businesses typically pare back their borrowing during recessions, while delinquency rates on outstanding loans rise. It's not yet clear if Upstart's operating model is geared to survive a U.S. recession. Upstart is also highly sensitive to monetary policy shifts and changes in Treasury bond yields. When interest rates are falling, consumers are often more willing to borrow. Though the Federal Reserve is currently in the midst of a rate-easing cycle, Treasury bond yields spiked at their fastest pace in decades in April. Near-term economic uncertainty, coupled with the prospect of higher borrowing rates, paints a potentially worrisome picture for Upstart. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $336,942!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $40,423!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $613,951!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of May 12, 2025 Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Palantir Technologies, Tesla, and Upstart. The Motley Fool has a disclosure policy. 3 High-Flying Artificial Intelligence (AI) Stocks That Can Plunge Up to 92%, According to Select Wall Street Analysts was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
08-05-2025
- Business
- Yahoo
Is Artificial Intelligence (AI) Stock Palantir Technologies in a Bubble? We Just Got Our Answer...
The rise of artificial intelligence (AI) is expected to add $15.7 trillion to the worldwide economy by 2030. AI colossus Palantir, whose stock has risen more than 1,800% since 2023 began, recently upped its full-year sales guidance by $147 million at the midpoint. Despite crushing Wall Street's expectations, Palantir's valuation multiple is breaking the mold and butting heads with history -- not in a good way. 10 stocks we like better than Palantir Technologies › Putting aside the exceptional volatility we've witnessed on Wall Street since the beginning of April, the can't-miss trend over the last two and a half years has unquestionably been the evolution of artificial intelligence (AI). In its simplest form, AI empowers software and systems with the ability to reason and act on their own. This capacity to make split-second decisions without human oversight, as well as evolve to (potentially) learn new skills or jobs, gives this technology a truly jaw-dropping addressable market. In Sizing the Prize, PwC pegged this market potential at $15.7 trillion, globally, by the turn of the decade. When most investors think of the AI revolution, Nvidia (NASDAQ: NVDA) is probably the first company that comes to mind. In less than two years, Nvidia went from being a fringe leader in the tech industry, with a $360 billion market cap, to the greatest thing since sliced bread, with a valuation that easily topped $3 trillion. Nvidia's Hopper (H100) graphics processing units (GPUs) and successor Blackwell GPU architecture rapidly became the preferred hardware in Al-accelerated data centers. But Nvidia has been usurped as Wall Street's AI darling by data-mining specialist Palantir Technologies (NASDAQ: PLTR). Heading into this week, Palantir was worth $293 billion, and its shares had risen by roughly 1,840% since the start of 2023. It went from being one of many high-growth tech stocks to a foundational piece of the AI revolution. Yet following the release of Palantir's much-anticipated first-quarter operating results, there's a new label that can be added: Wall Street's biggest bubble stock. Though I'll explain how it's a bubble stock in detail in a moment, let's take a closer look at how Palantir has dazzled Wall Street and added $278 billion in market value in 29 months. The biggest catalyst for Palantir is that its AI-driven software-as-a-service (SaaS) solutions can't be duplicated at scale. While the company's Gotham and Foundry platforms may contend with small-scale competition, there simply isn't a one-for-one replacement for the services they provide. Nothing on Wall Street is more valued by investors than a sustainable moat -- and Palantir certainly offers one. Gotham continues to be the crown jewel. This is the segment that lands multiyear contracts with the U.S. federal government and its allies. Gotham handles data collection and analysis, as well as plays a critical role in military mission planning and execution. America's robust defense spending has led to pretty consistent growth. In the March-ended quarter, U.S. government revenue soared by 45% from the prior-year period. Foundry hasn't been a slouch, either. This relatively newer platform leans on AI and machine learning to help businesses make sense of their data and streamline their operations. U.S. commercial revenue surged a whopping 71% during the first quarter, which is an indication that Palantir is just scratching the surface with this segment, as well as earning subscriptions from larger companies. Another reason Palantir has excelled is its push to recurring profitability, which occurred well before anyone on Wall Street had expected. Profits help to validate Palantir's dual-platform approach, and its sustained double-digit sales growth rate has clearly excited the investing community. Lastly, Palantir closed out March with $5.43 billion in cash, cash equivalents, and marketable securities, which represents about a $200 million boost from where it ended 2024. Having a lot of cash and no debt means CEO Alex Karp and his team can aggressively reinvest in its AI-powered platforms, as well as undertake shareholder-friendly actions at times, such as share buybacks. Considering the uncertainty surrounding President Donald Trump's tariff policy, as well as the possibility of the U.S. federal government reducing defense spending, investors were particularly interested in Palantir's forward-looking sales and adjusted free cash flow (FCF) guidance for the recently completed quarter. In early February, Palantir guided for $3.741 billion to $3.757 billion in full-year sales, with $1.5 billion to $1.7 billion in full-year adjusted FCF. On Monday, May 5, it upped its 2025 sales guide to $3.89 billion to $3.902 billion -- an increase of $147 million at the midpoint -- as well as lifted the high and low end of its adjusted FCF by $100 million to $1.6 billion to $1.8 billion. While Palantir increasing the midpoint of its sales guidance by 3.92% might sound impressive, it comes on the heels of its stock tipping the scales at north of 100 times trailing-12-month sales entering this week. Based on the midpoint of the company's now-dated 2025 sales guidance ($3.749 billion), Palantir would have been valued at a price-to-sales (P/S) ratio of roughly 78 come February 2026 (i.e., when it reports its fourth-quarter operating results). Updating for the new guidance, which calls for a midpoint of $3.896 billion in full-year revenue, lowers its projected year-end P/S ratio to (drum roll) 75.2! It hardly makes a dent. To put into context just how unbelievably expensive Palantir stock is relative to sales, take a closer look at how other market-leading businesses performed prior to bubble-bursting events. Before the dot-com bubble burst, Microsoft, Amazon, and Cisco Systems all peaked at respective P/S ratios ranging from roughly 31 to 43. I added Nvidia to this chart, as well, which topped out at a P/S ratio of just over 42 last summer. Though there are other public companies with P/S ratios north of 100, what we don't see is market-leading megacap businesses valued at P/S ratios north of 40 for any extended period -- let alone a P/S ratio that's camped out at more than 100! To add fuel to the fire, every next-big-thing innovation for more than 30 years has navigated its way through a bubble-bursting event early in its expansion. Investors have persistently overestimated how quickly a new technology will be utilized and adopted, which eventually leads to outsized expectations not being met. While a company like Nvidia would almost immediately feel the pain associated with an AI bubble-bursting event, Palantir Technologies would be partially insulated by its multiyear government contracts and Foundry subscription revenue. But "partially insulated" doesn't mean immune. Palantir's unjustifiable valuation premium would almost certainly come under fire if the AI bubble bursts, which history suggests will eventually happen. Rarely are stock-specific bubbles this easy to recognize. Though I do believe Palantir is worthy of some level of premium due to its sustainable moat and recurring revenue, no market leader has been able to sustain a P/S ratio of 30, let alone 75 or 100. Palantir is, in my view, Wall Street's biggest bubble stock. Before you buy stock in Palantir Technologies, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Palantir Technologies wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $613,546!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $695,897!* Now, it's worth noting Stock Advisor's total average return is 893% — a market-crushing outperformance compared to 162% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of May 5, 2025 John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Cisco Systems, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. Is Artificial Intelligence (AI) Stock Palantir Technologies in a Bubble? We Just Got Our Answer... was originally published by The Motley Fool Sign in to access your portfolio
Globe and Mail
05-05-2025
- Business
- Globe and Mail
2 Magnificent Artificial Intelligence (AI) Stocks to Buy in May and 1 to Avoid
For much of the last two-and-a-half years, the bulls have been in firm control on Wall Street. While a confluence of factors is responsible for lifting all three of Wall Street's major stock indexes to new heights in 2024 (and early 2025 for the S&P 500), it's the evolution of artificial intelligence (AI) that stands head-and-shoulders above other catalysts. The broad-stroke excitement with AI is that it allows enabled software and systems to reason and act on their own. Looking a bit further down the line, machine learning, when coupled with AI capabilities, can lead to software and systems learning new jobs and skillsets, all without human oversight. The global addressable market for artificial intelligence is vast. In Sizing the Prize, the analysts at PwC pegged it at $15.7 trillion by 2030. This figure includes an estimated $6.6 trillion from productivity improvements, along with $9.1 trillion from various consumption-side effects. But as previous next-big-thing innovations and technologies have taught investors, not every cutting-edge company is necessarily worth buying. As we move into May, two magnificent AI stocks stand out as no-brainer buys for a multitude of reasons. Meanwhile, one of Wall Street's AI darlings appears priced for perfection and is worth avoiding. Artificial intelligence stock No. 1 that can be purchased with confidence in May: Alphabet The stock market entered 2025 with one of its priciest valuations in history. In many instances, AI stocks were leading the charge, with valuations that were well beyond historical norms. But this isn't the case with Google parent Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), which is one of the cheapest AI stocks on the planet. Alphabet is best-known for its world-leading internet search platform, Google. Data aggregated by GlobalStats finds that Google has controlled an 89% to 93% monthly share of worldwide internet search when looking back more than a decade. Google's near-monopoly status ensures strong ad pricing power and relatively consistent operating cash flow for its parent company. But while advertising is Alphabet's foundation, AI-driven cloud infrastructure service platform Google Cloud is its future. Google Cloud became recurringly profitable in 2023 and is currently generating $49 billion in annual run-rate sales. Cloud-service margins are considerably higher than those associated with advertising, meaning a faster growth rate for Google Cloud will disproportionately benefit the company's bottom line. Alphabet is investing aggressively in AI hardware to give its Google Cloud customers access to generative AI solutions, as well as large language model technology. The ongoing integration of AI solutions into its cloud infrastructure service platform should sustain or accelerate Google Cloud's double-digit growth rate. Another reason investors can trust in Alphabet is its hearty cash position. It closed out March with $95.3 billion in cash, cash equivalents, and marketable securities, all while generating $36.2 billion in net cash from its operations through the first three months of 2025. This boatload of capital allows the company to invest in faster-growing initiatives, as well as to reward shareholders by repurchasing its own stock. Shares of Alphabet can be scooped up right now for less than 16 times forecast earnings per share (EPS) in 2026. This equates to a 31% discount to its average forward price-to-earnings (P/E) multiple over the last five years. Artificial intelligence stock No. 2 that's a screaming buy in May: Baidu April was a month marked by heightened trade tensions between the U.S. and China, the world's No. 2 economy by gross domestic product. In spite of these ongoing risks, the time to pounce on one of China's most important AI-powered tech stocks, Baidu (NASDAQ: BIDU), has arrived. Similar to Alphabet, Baidu's core business is ad-driven. With few exceptions, Baidu has sustained a 50% to 85% monthly share of China's internet search market over the trailing decade. Even though Baidu's influence is limited to its home market, it's clearly the top choice by China-based businesses looking to market to consumers. Not to sound like a broken record, but this translates into predictable cash flow and reasonably strong ad-pricing power. However, it's Baidu's non-online marketing segment that's likely to be its premier growth driver in the latter-half of the decade, if not well beyond. For instance, even though Baidu's net sales advanced by a low-single-digit percentage during the December-ended quarter, AI Cloud revenue surged 26% and helped lift non-online marketing segment sales up 18% from the prior year. Like Alphabet, Baidu is willingly spending on AI solutions for its cloud infrastructure service platform. But there's more to Baidu's AI ambitions than just cloud services. Baidu is the parent of Apollo Go, which is the world's (thus far) most-successful autonomous driving company. In January, it surpassed 9 million cumulative rides since its inception. It's also the first autonomous vehicle (AV) company to be granted a permit to conduct testing on public roads in Hong Kong. If the global addressable AV market is even a fraction as large as some analysts have suggested, Baidu can be an absolute juggernaut. Baidu is also sitting on a mountain of cash. It ended 2024 with the U.S. equivalent of around $19 billion in cash, cash equivalents, restricted cash, and short-term investments. There's plenty of capital to invest in its AI-driven future. Lastly, Baidu stock can be picked up for less than 8 times forward-year EPS. Even accounting for U.S.-China trade war tensions, this is historically inexpensive. The AI stock that investors would be wise to avoid in May: Palantir Technologies As a reminder, not every company associated with a next-big-thing trend is necessarily going to be a winner. Though its shares have risen by more than 1,700% since the end of 2022, AI-fueled software-as-a-service (SaaS) solutions provider Palantir Technologies (NASDAQ: PLTR) is a stock worth avoiding in May. To be objective, Palantir does deserve some degree of valuation premium. Though it contends with small-scale competitors, there isn't a company that can replace the services Palantir provides through its Gotham and Foundry platforms at scale. Irreplaceability is hard to find among publicly traded companies, and sustainable moats tend to be rewarded. Palantir has also been growing sales at a lightning-fast pace. Gotham, which provides federal governments with data collection/analytics, as well as tools to conduct military missions, continues to benefit from robust, multiyear contracts won from the U.S. government. Palantir's ability to generate recurring profits has gone a long with the investing community. But there are three big headwinds Palantir is up against in 2025, and all of them suggest its share price is (eventually) headed lower. To begin with, it's unclear if the Donald Trump administration plans to increase defense spending. With the Pentagon, in February, proposing $50 billion in annual cuts over the next five years, Palantir's top-tier growth engine (Gotham) could shift down a gear or two. Secondly, every next-big-thing trend for more than 30 years has navigated its way through a bubble-bursting event. This is to say that investors have always overestimated how quickly a new innovation would gain utility and widespread adoption. Though Palantir's multiyear contracts via Gotham and subscription revenue from Foundry would buoy short-term sales, investor sentiment tied to a bubble-bursting event would almost certainly weigh on its stock. Third and most important, Palantir's valuation is far beyond historical norms. Prior to the bursting of previous bubbles over the last three decades, industry-leading companies peaked at price-to-sales (P/S) ratios of 30 to 43. Palantir Technologies' stock is tipping the scales at a P/S ratio of 101! No industry-leading company has ever been able to maintain such an outsized premium over an extended timeline. Should you invest $1,000 in Alphabet right now? Before you buy stock in Alphabet, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Alphabet wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. 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