In October, Wall Street celebrated its second year (and counting) in a resounding bull market. Even if a confluence of factors is responsible for the lifting of the Dow Jones Industrial Average, S&P500And Nasdaq Composite at several record highs last year, none played a more significant role than the rise in artificial intelligence (AI).
AI gives software and systems the ability to make split-second decisions without the need for human input or intervention. This is a very useful technology in virtually every industry around the world.
Image source: Getty Images.
But as we’ve seen with other breakthrough technologies and innovations over the past two decades, not everyone who gets in early is necessarily a long-term winner. The wide variation seen in price targets for artificial intelligence stocks on Wall Street speaks to this mixed outlook.
Based on low price targets posted by some Wall Street analysts, the next three top AI stocks are expected to plunge as much as 86% in the new year.
The top fast-growing AI stock that at least one Wall Street analyst thinks will fall in 2025 is the customizable rack server and storage solutions company. Super microcomputer(NASDAQ:SMCI). According to Mehdi Hosseini or Susquehanna, Supermicro stock is heading toward $15 per share, which would equate to a whopping 55% drop from the stock’s Jan. 3 closing price.
On paper, Supermicro is ideally positioned to benefit from the AI revolution. Companies pay a lot of money for the data center infrastructure needed to make split-second decisions, run generative AI solutions, and build/train large language models. In fiscal year 2024, Supermicro’s net sales jumped 110% to nearly $15 billion.
To add fuel to the fire, Super Micro Computer uses NvidiaThe ultra-popular graphics processing units (GPUs) in its rack servers. Because Nvidia’s chips have superior computing speed, this made SuperMicro’s servers even more desirable.
But as Hosseini’s price target indicates, things didn’t go as planned. In late August, Super Micro Computer was the subject of a research report from notorious short seller Hindenburg Research, which alleged, among other things, “accounting manipulation.” Since this report, the company has:
Delayed filing its annual report.
Has a preliminary investigation been launched by federal regulators into its accounting practices, according to The Wall Street Journal.
Ernst & Young resigned as auditor of the company.
If there is a glimmer of hope for Supermicro, it is that an independent special committee found no evidence of management misconduct and expected no restatement of past financial statements from the company. Still, nothing is concrete until the company’s new auditor approves its financial statements and the company files its annual report with the Securities and Exchange Commission.
With competition in data center infrastructure intensifying, a wait-and-see approach seems prudent with Super Micro Computer.
Image source: Getty Images.
A second top AI stock that could reverse its trend in the new year is the cloud-based data mining specialist. Palantir Technologies(NASDAQ:PLTR). Although Palantir’s stock has gained 1,140% over the past two years, RBC Capital analyst Rishi Jaluria believes the company’s shares will return to $11, representing a potential decline of 86%. in 2025.
Palantir’s near-parabolic rise over the past two years reflects the uniqueness of its operating model. The company’s AI-inspired Gotham platform, which helps federal governments collect data and plan missions, and the AI and machine learning-powered Foundry platform, which makes sense of the Big Data for businesses has no one-for-one replacement at scale. This means that Palantir’s operating cash flows are secure and highly predictable.
Aside from Palantir’s irreplaceability, investors also appreciate the company’s move toward recurring profitability much sooner than expected. Multi-year contracts won from the U.S. government helped sustain double-digit sales growth and propelled Palantir decisively into the profit column.
However, maintaining its dizzying stock market gains could prove difficult. For starters, Gotham’s long-term growth track has a built-in cap. Palantir’s management team will not allow China, Russia, and other countries not allied with the United States to access its intuitive platform.
Perhaps the biggest issue for Palantir, which is an obvious concern raised by Jaluria, is the company’s valuation. Throughout history, companies at the forefront of cutting-edge innovations have often achieved a price-to-sales (P/S) ratio of 30 to 40. Palantir currently has a P/S ratio of almost 73. Although a premium valuation is justified given the irreplaceable nature of the company, no company has been able to maintain such a high valuation.
Although an 86% drop, as Jaluria predicts, seems a bit excessive for a company with sustained double-digit growth, a significant correction wouldn’t be a surprise.
The third top AI stock that could fall in the new year, according to a Wall Street analyst’s price forecast, is the speech recognition and conversational AI technology specialist. AI SoundHound(NASDAQ:SON). Ladenburg Thalmann analyst Glenn Mattson predicts SoundHound shares will fall from north of $20 to just $7 in 2025, which would represent a 66% decline.
Similar to Palantir, SoundHound AI stock has gone nearly parabolic in recent months. The wind in SoundHound’s sails is tied to its position in the next stage of AI evolution. The rise of AI agents is expected to be the hottest trend in artificial intelligence this year. SoundHound envisions a world where AI voice integration and intuitive controls can unify voice ecosystems.
The company is currently growing like a weed, with reported sales up 89% in the third quarter from the year-ago period, and the company’s largest customer accounting for just 12% of net sales, compared to 72% previously. This indicates that SoundHound’s push into new verticals, along with the acquisition of new customers, is helping to diversify and strengthen its revenue streams.
On the other hand, SoundHound Ai is unprofitable and consuming a lot of money as it expands into new verticals. During the first nine months of 2024, more than $75.7 million in cash was used for operating activities. Even though sales are expected to potentially double in 2025, the company’s cash burn and operating losses are expected to continue.
SoundHound’s valuation is also concerning. Although traditional fundamental metrics like the price-to-earnings (P/E) ratio don’t work with startup companies, SoundHound’s P/S ratio of 94 indicates a recent unsustainable rise in its stock price.
Finally, history has not been kind to large-scale innovations for three decades. Investors consistently overestimated the adoption rate and early usefulness of new technologies, ultimately leading to the bursting of a bubble. While this doesn’t mean that AI won’t eventually be a game-changer, it does imply that every innovation needs time to mature, even artificial intelligence. If the AI rally fades, companies that enjoy a significant premium, like SoundHound AI, could take the chin.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Nvidia and Palantir Technologies. The Mad Motley has a disclosure policy.
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