Palantir and CoreWeave have more than doubled this year, but certain analysts expect the artificial intelligence (AI) stocks to drop sharply in the coming months.
Palantir says it has a unique ability to deliver on demand for AI due to its software architecture, but it’s also the most expensive stock in the S&P 500 by a wide margin.
CoreWeave’s debt-intensive business model is cutting into profits, but the company runs the leading AI cloud, and the stock trades at a reasonable valuation.
Palantir Technologies(NASDAQ: PLTR) shares have gained 105% this year, while CoreWeave (NASDAQ: CRWV) shares have advanced 115%. Yet the Wall Street analysts listed have sell ratings on the stocks, and their target prices imply substantial losses for shareholders:
Brent Thill at Jefferies has set Palantir with a 12-month target price of $60 per share. That implies 61% downside from its current share price of $155.
Gil Luria at D.A. Davidson has set CoreWeave with a 12-month target price of $36 per share. That implies 59% downside from its current share price of $88.
Here’s what investors should know about these popular artificial intelligence (AI) stocks.
Image source: Getty Images.
Palantir develops data analytics software. Its core platforms let users integrate, organize, and visualize complex information to support decision-making across the defense, intelligence, and corporate sectors. The company also develops an artificial intelligence platform (AIP) that lets developers integrate large language models into workflows and applications.
Palantir’s unique software architecture — its platforms revolve around an ontology, a digital representation of an organization’s data, processes, and assets — differentiates it from alternative products. “Our foundational investments in ontology and infrastructure have positioned use to uniquely deliver on AI demand,” says CTO Shyam Sankar.
Palantir reported strong second-quarter financial results. Customers climbed 43% to 849, and the average spend per existing customer increased 28%. In turn, revenue surged 48% to $1 billion, the eight straight acceleration, and non-GAAP (generally accepted accounting principles) earnings rose 77% to $0.16 per diluted share.
Investors have good reason to think the company can keep its momentum. Grand View Research expects spending on artificial intelligence to increase at 36% annually through 2030, while spending on decision intelligence platforms increases at 15% annually during the same period. So, Palantir’s sales could grow faster than 20% annually through the end of the decade.
However, Palantir has a valuation problem. Its price-to-sales ratio of 115 makes it the most expensive stock in the S&P 500(SNPINDEX: ^GSPC) by a long shot. No other company in the index trades above 30 times sales, meaning Palantir could drop 70% and still be the most expensive stock. In that context, it is entirely possibly that Palantir suffers a full-blown meltdown at some point in the future.
CoreWeave provides cloud infrastructure and software services purpose built for artificial intelligence workloads. In traditional data centers, up to 65% of compute capacity in graphics processing units (GPUs) is lost to system inefficiencies, but CoreWeave GPU clusters deliver up to 20% better performance than alternative clouds.
The company reported mixed second-quarter financial results. Revenue increased 207% to $1.2 billion, and non-GAAP operating income rose 135% to $200 million. CoreWeave also said its revenue backlog jumped 86% due to expanded deals with an unnamed hyperscale company and OpenAI. However, its non-GAAP net loss widened to $131 million, much steeper than the $5 million loss reported last year.
Interest payments are the primary reason for the discrepancy between non-GAAP operating income and non-GAAP net income. Data centers are expensive to operate, especially when filled with AI systems. CoreWeave has taken on a large amount of debt to build its infrastructure, and interest expenses totaled $267 million in the second quarter.
However, the company borrows responsibly. CoreWeave only takes on debt when signed contracts create a need for more infrastructure, and only if the contract more than covers the entire cost of the debt. Even so, interest payments are such a substantial headwind that the company is unlikely to turn a profit until 2027, which means the stock is likely to be volatile.
CoreWeave currently trades at 10 times sales, a very reasonable valuation for a company whose revenue is forecast to increase at 127% annually through 2026. In that context, I highly doubt the stock will decline 59%. In fact, I think investors comfortable with volatility should consider buying a few shares.
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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Jefferies Financial Group and Palantir Technologies. The Motley Fool has a disclosure policy.
