These High-Flying Artificial Intelligence (AI) Stocks Could Sink 20% or More Over the Next 12 Months, According to Wall Street

Artificial intelligence (AI) is almost like King Midas. Nearly everything it touches turns to gold. Just look at the stock charts of many of the leaders in AI chips and software.

But just as the story of the fabled king took a turn for the worse, some of the stocks that have been gold mines for investors just might be headed for a rough patch. These high-flying AI stocks could sink 20% or more over the next 12 months, according to Wall Street.

Arm Holdings: The sizzle could fizzle

Arm Holdings (NASDAQ: ARM) shares have more than doubled over the last 12 months. Most of the huge gain came in February after the chipmaker topped analysts’ fiscal 2024 third-quarter revenue and earnings estimates and provided upbeat sales guidance.

There’s no doubt whatsoever that AI is the primary source of Arm’s good fortunes. CEO Rene Haas said in the quarterly conference call that the company is “seeing strong momentum and tailwinds from all things AI.” That’s great news since, as Haas wrote to shareholders, “From the most complex AI cloud applications to the smallest edge devices, AI on Arm is everywhere.”

Haas wasn’t exaggerating. Nvidia‘s GH200 Grace Hopper Superchip uses Arm technology. So does Alphabet‘s Google Gemini Nano large language model (LLM) that runs on Pixel 8 smartphones. Other companies, including Samsung and Vivo, have also announced new smartphones that use Arm technology to run generative AI apps.

However, many on Wall Street think that Arm’s sizzle will soon fizzle. The average 12-month price target for the stock is 25% below the current share price. The most pessimistic analyst projects that Arm’s shares could plunge nearly 60%.

Why such negativity? Valuation is the main culprit. Arm’s shares now trade at a forward price-to-earnings ratio of 78x.

Palantir Technologies: A polarizing AI software leader

While AI chip stocks have ranked among the biggest winners, several AI software stocks have also delivered big gains. Palantir Technologies (NYSE: PLTR) is a good…