2 AI Stocks to Consider Selling Before They Decline

Shares of Tesla (TSLA) have surged 75% since the recent presidential elections. However, a significant number of Wall Street analysts now believe that this stock is overvalued. The median 12-month target is set at $275 per share, indicating a potential downside of 38% from its current price of $440.

Joseph Spak from UBS is particularly doubtful about Tesla's prospects. Although he raised his target price to $226 in November, he maintains a sell rating. He believes that the market is too optimistic about Tesla's artificial intelligence (AI) goals, suggesting that this could lead to a 49% decrease in share price.

On the other hand, shares of Palantir Technologies (PLTR) have jumped more than fourfold this year, largely due to several strong financial results. Despite this, most analysts now consider the stock to be overpriced. The median 12-month target is set at $39 per share, implying a 47% decrease from its current price of $74.

Brent Thill from Jefferies shares a particularly pessimistic outlook. He reiterated a price target of $28 per share in November, holding a sell rating. He cites valuation as a significant issue for Palantir, with his outlook indicating a potential 62% drop.

Here’s what investors need to know about Tesla and Palantir.

Tesla: The stock that UBS believes could drop 49%

Tesla did report positive third-quarter financial results. Revenue rose by 8% to $25.1 billion, driven by sales growth in energy generation and storage, as well as in services like supercharging and insurance. Gross margins increased by 195 basis points, partially due to higher sales of full self-driving (FSD) technology, and non-GAAP earnings went up by 9% to $0.72 per diluted share.

Although revenue and earnings growth were not extraordinary, the gross profit margin reached 19.8%, the highest since 2022. This is encouraging, especially as Tesla has faced challenges due to rising interest rates affecting demand and leading to price cuts that hurt profits. Notably, earnings had declined in the previous four quarters. However, with interest rates easing, margins appear to be improving, indicating potential recovery.

Additionally, CEO Elon Musk mentioned on an earnings call that Tesla plans to launch an unsupervised version of its FSD software and introduce a ride-hailing service to the public in California and Texas next year. This move could greatly expand Tesla's market. A Statista report suggests that spending on autonomous ride-hailing services could reach $5 trillion by 2030.

Nonetheless, Wall Street expects Tesla's adjusted earnings to increase by 29% in the next year. This projection makes its current valuation of 180 times adjusted earnings seem steep, although there may be potential for accelerated earnings growth as Tesla gains more revenue from FSD and develops its robotaxi service. Therefore, the current high valuation could appear reasonable in hindsight.

While I do not fully agree that Tesla stock will fall by 49% as Spak suggests, investors should still be mindful of the possibility of a significant drop. The impressive 75% gain following the elections is based on the belief that Musk's connections to President-elect Donald Trump will benefit Tesla. While this may hold some truth, stock volatility is likely to persist without clear evidence. Investors unsure of their positions might consider reducing their stakes.

Palantir Technologies: The stock Jefferies believes could decline by 62%

Palantir recently reported strong third-quarter financial results. The number of customers increased by 39% to 629, and existing customers spent 18% more on average. Revenue rose 30% to $725 million, marking the fifth consecutive quarter of growth. Non-GAAP earnings also climbed by 43% to $0.10 per diluted share. Additionally, management raised its guidance, forecasting a 26% revenue increase for the full year in 2024.

The demand for Palantir’s AIP product, which integrates AI capabilities into its primary data analytics platforms, has fueled this growth. CEO Alex Karp highlighted the transformative impact of AIP in his letter to shareholders.

Forrester Research recently ranked Palantir as a leader in AI and machine learning software, a promising sign for the company. There is a strong expectation that spending on AI platforms will grow at an annual rate of 51% through 2028, with AI platforms projected to become the fastest-growing technology in the coming years.

However, Palantir faces significant valuation challenges. Wall Street anticipates adjusted earnings growth of 31% over the next year, making the current valuation of 210 times adjusted earnings look excessively high. The sharp rise in share prices this year has primarily been due to increases in multiples rather than actual earnings growth, which is not a sustainable trend.

While I don’t predict a 62% drop in Palantir shares as Thill suggests, investors with large holdings may want to consider selling some or all of their shares. Palantir is clearly tapping into a substantial opportunity, but even the best business does not justify any price point. In this case, the valuation appears disconnected from the underlying business fundamentals.

Investors should proceed with caution and stay informed about market dynamics.

Stocks, Tesla, Palantir