2 Crashing AI Stocks That Aren't Worth Buying on the Dip

Three years after the launch of OpenAI's ChatGPT, the generative AI hype is beginning to fade as investors grow frustrated with the slow pace of value generation in the software sector of the industry.

Companies involved in artificial intelligence (AI) like Tesla and Palantir Technologies are finding it challenging to support their optimistic valuations. They are also facing challenges due to diminishing political excitement, which had previously boosted their stock prices. Let's explore why these companies may not be good buys, even on a dip.

1. Palantir Technologies

Palantir's promising narrative is starting to falter, with its shares having dropped by 36% from their all-time high of $125 in mid-February. The stock saw significant gains after integrating AI large language models (LLMs) into its data analysis offerings. However, the anticipated benefits of this transition and the political backing derived from Trump's election have not delivered the expected results.

Palantir's co-founder, Peter Thiel, is known as a strong supporter of Trump and his vice president, JD Vance. However, it remains uncertain how this political association will result in tangible advantages for the company. Some of the new administration's proposed actions, like reducing the Pentagon’s budget by 8% each year, could actually diminish the need for Palantir's services given that government clients already account for roughly 42% of its total revenue.

Moreover, the anticipated transformation from Palantir's AI strategy appears less revolutionary than many investors hoped. The company’s sales growth, which soared by 47% in 2020 before the rise of generative AI, has seen a drop to 29% in 2024. While still decent, this growth rate fails to justify the company's staggering price-to-earnings (P/E) ratio of 419.

On the profitability front, Palantir is grappling with hefty stock-based compensation costs, amounting to $281.8 million in the last quarter, which includes 74% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

2. Tesla

Similar to Palantir, Tesla’s stock surge followed generative AI developments and Trump’s election. However, while CEO Elon Musk has some influence in the current political climate, investors might have underestimated the potential adverse effects of his company's political ties.

Analysts from JPMorgan have pointed out that Tesla is facing unprecedented reputational harm, which is starting to reflect in sales figures. In countries like Germany, sales plummeted by 76% year-over-year in February, totaling just 1,429 vehicles.

Fortunately, the decline in sales in Europe may not critically hurt Tesla as these markets aren't as vital to its overall performance. Additionally, Musk might utilize his political connections to mitigate potential challenges in China, the largest electric vehicle (EV) market, where he needs to navigate rising local competition. In 2024, Tesla managed to sell over 657,000 units in China, but this situation requires careful attention going forward.

Given a P/E ratio of 118, Tesla appears overvalued when considering its decline in sales and reputational struggles across various international markets. Although a move towards AI and self-driving technology could eventually provide Tesla with new revenue alternatives beyond its automotive focus, investors may want to steer clear of the stock for now.

Which Stock Has a Better Chance of Recovery?

Both Palantir and Tesla show signs of being overvalued and could face further downturns. However, Palantir seems more likely to experience a significant crash due to its extreme level of overvaluation. While Tesla is not without its immediate challenges, the potential for its self-driving innovations to open up new avenues for revenue in software and services suggests that it may be worth monitoring. Investors should remain cautious but could consider keeping an eye on Tesla for updates on its long-term growth potentials.

stocks, AI, investing