AI Hype Fading? 2 Stocks to Keep an Eye On.

Published Date: 11/07/2024

Palantir Technologies and Arm Holdings have seen significant gains this year, but some analysts predict a sharp decline in their stock prices.

The enthusiasm surrounding artificial intelligence (AI) has driven the S&P 500 to record highs in 2024. Palantir Technologies and Arm Holdings have been among the top beneficiaries, with year-to-date gains of 61% and 145%, respectively. However, some Wall Street analysts believe the stocks have gotten ahead of themselves, predicting substantial downside for shareholders.

Palantir Technologies provides four primary software platforms that enable clients to integrate data, develop AI and machine learning (ML) models, and design analytics applications to improve decision-making. Despite being considered a leader among AI/ML platform providers by Forrester Research, Palantir's valuation looks expensive, with a price-to-earnings ratio of 99 times adjusted earnings. Analysts expect adjusted earnings per share to grow at 22% annually through 2026, which may not justify the current valuation.

Arm Holdings, on the other hand, designs central processing unit (CPU) architectures that it licenses to clients like Apple, Amazon, and Nvidia. The company has seen significant growth, with revenue increasing 47% to $928 million in the fourth quarter of fiscal 2024. However, management's guidance implies a surprising deceleration in revenue growth, and the company's valuation of 144 times adjusted earnings looks outrageously expensive.

While analysts' predictions of a 67% decline in Palantir's stock price and a 64% decline in Arm's stock price may be extreme, investors should consider trimming their positions in these high-flying AI stocks.

Palantir Technologies is a software company that provides data integration and AI/ML platforms to clients across various industries.

Arm Holdings is a semiconductor company that designs and licenses CPU architectures to clients like Apple, Amazon, and Nvidia. The Motley Fool is a financial services company that provides investment advice and recommendations to its clients.

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