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

As time passes since OpenAI launched ChatGPT three years ago, the hype surrounding generative AI is fading. Many investors are feeling restless because they see little value being produced in the software sector of the industry.

Two notable technology companies involved in artificial intelligence, Tesla and Palantir Technologies, are now facing challenges in defending their lofty valuations. The stock prices which previously thrived on political excitement following Trump's election have begun to unravel, and this article explores why these stocks may not be wise choices to purchase even during their dips.

1. Palantir Technologies

Palantir Technologies is seeing its bullish outlook diminish, with its stock down approximately 36% from its peak of $125 in mid-February. The company saw a surge in its stock price after integrating advanced AI large language models into its data analytics platforms. However, the excitement that followed Trump's victory seems to be waning.

Palantir's co-founder, Peter Thiel, has publicly supported political figures like Trump, but the benefits to Palantir are unclear. In fact, some upcoming government budget cuts, such as a proposed 8% annual reduction in the Pentagon's budget, could negatively affect Palantir's service market. Notably, around 42% of Palantir's revenue comes from government contracts.

Additionally, the anticipated transformation due to Palantir's pivot toward AI is not as revolutionary as stakeholders had hoped. The company's sales experienced a remarkable growth of 47% in 2020, before the mainstream emergence of generative AI, but this growth has slowed down to only 29% in 2024. While this growth rate isn't terrible, it doesn't justify Palantir's extremely high price-to-earnings (P/E) ratio of 419.

Profitability for Palantir is also challenged by the hefty stock-based compensation expenses, which amounted to $281.8 million in the fourth quarter, representing 74% of its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

2. Tesla

Similar to Palantir, Tesla's stock saw a substantial rise linked to the excitement of generative AI and the political atmosphere after Trump's election. However, Tesla's CEO, Elon Musk, is now facing challenges that result from his political entanglements.

Analysts from JPMorgan have noted Tesla's reputation is suffering unprecedented damage, which is adversely affecting its sales. For example, sales in Germany fell by an alarming 76% compared to last year, bringing unit sales down to just 1,429 vehicles in February.

Though this situation looks dire, it is worth noting that individual European markets may not be as crucial to Tesla's overall performance. Musk could leverage his political influence to improve relations in China, the largest EV market, where Tesla sold over 657,000 units in 2024. Addressing potential anti-U.S. sentiments will be critical for Tesla as domestic competitors grow stronger.

With a P/E ratio of 118, Tesla's current valuation appears inflated, especially considering it is facing a slowdown in sales and reputational issues. While a shift toward AI and autonomous driving could eventually help the company extend its reach beyond just automotive sales, investors should remain cautious about jumping into the stock at this time.

Comparing Recovery Potential

Both Palantir and Tesla currently present risks with their overvalued stocks, but Palantir is more likely to experience a significant decline due to its greater overvaluation. Tesla, on the other hand, while also under pressure, has the potential for recovery through its self-driving technology that might open up new revenue streams in software and services. Thus, while now may not be the right time for investors to buy either stock, keeping Tesla on a watch list could be prudent as new growth opportunities emerge.

AI, Stocks, Investing