3 Artificial Intelligence (AI) Stocks That Went Parabolic Can Plunge by Up to 78%, According to Select Wall Street Analysts

For almost two years, artificial intelligence (AI) has dominated the discussion on Wall Street — and with good reason.

The ability for AI-driven software and systems to learn and evolve over time without human intervention gives this technology utility in most sectors and industries around the globe. The rise of AI is why the analysts at PwC forecast a $15.7 trillion lift to the worldwide economy by 2030.

However, previous next-big-thing innovations have consistently shown that not all participants will be winners, or at the very least sustain their parabolic moves higher. Although artificial intelligence has been a boon for a number of tech-driven companies, three AI-dependent highfliers can plunge by up to 78%, based on the price targets issued by select Wall Street analysts.

Upstart Holdings: Implied downside of 76%

A second artificial intelligence stock that’s had a few parabolic moves upward since this decade began, but could be staring down a sizable decline in the not-too-distant future based on the forecast of one Wall Street analyst, is cloud-based lending platform Upstart Holdings (NASDAQ: UPST). Wedbush analyst David Chiaverini has Upstart’s stock retreating to $10 per share, which would represent a drop of 76% from where it ended on Oct. 4.

On paper, Upstart is an exciting business model. Instead of the traditional loan-vetting process taking weeks and costing lending institutions time and money, Upstart’s platform was able to fully automate 91% of loan applicants during the second quarter. The company’s approval process leans on AI and machine learning to assess risk and approve/deny loans.

Upstart is also working with more than 100 banks and credit unions. Its AI-driven lending model is leading to more approvals and expanding the pool of clients for financial institutions without adversely impacting their delinquency and charge-off rates.

However, Upstart’s model is highly dependent on favorable lending rates. The Federal Reserve’s steepest rate-hiking cycle in four decades, which began in March 2022, reduced demand for personal, auto, and home loans. Even with the nation’s central bank kicking off a rate-easing cycle in September, rates will likely need to fall a lot more before lending activity really picks up.

Upstart’s operating model isn’t time-tested, either, which may give Wall Street and investors some level of pause. When interest rates were near historic lows earlier this decade, Upstart’s model was growing lightning fast and the company was profitable on a recurring basis. It’s now losing money every quarter and its growth engine has completely stalled.

It’s also unclear how Upstart would fare if a U.S. recession were to occur. A couple of predictive indicators, such as a historic decline in U.S. M2 money supply and the longest yield-curve inversion on record, suggest economic weakness is a real possibility. Lending is highly cyclical and Upstart is still trying to find its footing following the fastest rate-hiking cycle since the early 1980s.

Palantir Technologies: Implied downside of 78%

The third AI stock that went parabolic but may come tumbling back down, based on the estimate of one Wall Street analyst, is data-mining specialist Palantir Technologies (NYSE: PLTR). RBC Capital’s Rishi Jaluria has maintained a $9 price target for Palantir, which if accurate would imply downside to come of 78%!

Palantir’s monstrous run-up is a reflection of its operating model being unique. The company’s Gotham platform, which caters to select federal governments, relies on AI and machine learning to help with data collection/aggregation and mission planning, among other tasks. Gotham has been Palantir’s primary source of growth in recent years, with many of its largest contracts spread out over four or five years.

However, the company’s future is very much dependent on its relatively nascent Foundry platform. Foundry also incorporates AI solutions and is focused on helping businesses streamline their operations by better understanding their data.

Although Palantir’s irreplaceability and sustained double-digit growth rate are worthy of some level of valuation premium, there are reasons to believe its stock has hit a plateau.

For instance, Palantir’s Gotham platform is only available to select nations that are allies of the United States. This is to say that the company’s leadership wouldn’t allow China, as an example, to access Gotham. Despite generating consistent sales growth from Gotham, this does place a glass ceiling over this operating segment.

Palantir’s valuation is less than palatable, as well. Shares closed out the previous week at an estimated 93 times forward-year earnings and 27 times forecast revenue. These are nosebleed multiples that will require flawless execution, which is something rarely witnessed on Wall Street over extended periods.

Though Jaluria’s $9 price target appears overly pessimistic, optimists have likely also overshot to the upside.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Upstart. The Motley Fool has a disclosure policy.

3 Artificial Intelligence (AI) Stocks That Went Parabolic Can Plunge by Up to 78%, According to Select Wall Street Analysts was originally published by The Motley Fool