In recent years, AI stocks have soared, attracting attention from investors everywhere. However, behind this meteoric rise lies a hidden danger—many of these stocks have become dangerously overvalued. Today, we’ll dive into two AI stocks that have garnered significant hype: Palantir and BigBear.ai. Despite their impressive growth over the last year, Wall Street analysts believe these stocks are now priced to fall, and it might be time for investors to cash out.
Palantir Technologies is one of the fastest-growing software and AI companies in the world. Known for its work with governments, large organizations, and businesses to organize and analyze massive amounts of data, Palantir has seen tremendous growth. Last quarter, its total revenue rose 39% year-over-year to $884 million. U.S. revenue grew by 55%, with commercial revenue in the U.S. skyrocketing by 71%. These figures demonstrate how fast AI applications are expanding in the U.S.
Despite these strong results, Palantir's stock price has surged nearly 400% over the past 12 months, making it one of the most valuable companies globally, with a market capitalization of around $317 billion. However, this price increase raises some serious concerns. Palantir’s stock currently trades at a price-to-sales (P/S) ratio of 107, which implies that investors are expecting unsustainable growth in the future.
Let’s break it down: Palantir’s trailing revenue stands at $3.11 billion. Even if the company were able to grow its revenue tenfold over the next decade—a highly optimistic scenario—it would be looking at around $31 billion in revenue. If it maintains a 30% profit margin, that would result in about $10 billion in annual earnings. Given the current market cap, Palantir’s price-to-earnings (P/E) ratio would exceed 30. This is a red flag, as it suggests that the stock is significantly overvalued. Even under the most optimistic growth scenario, the stock is unlikely to see much higher returns over the next decade.
Renowned investor Warren Buffett often emphasizes that successful long-term investing requires more than just evaluating a company's current performance; it’s about assessing whether the company can sustain its growth. Palantir’s high valuation is a clear indication that the market is overly optimistic about its future, and this stock might not be as attractive as it seems.
BigBear.ai, which provides AI-powered decision-making tools for businesses, has also garnered attention in recent months. Its stock has surged by an impressive 441% over the past year, but the company's fundamentals tell a different story. With a P/S ratio of 12, BigBear.ai isn’t as extreme as Palantir, but its performance is far weaker.
Revenue growth at BigBear.ai is slow. Last quarter, sales grew by only 5%, totaling $34.8 million. The company’s gross margin is just 21.3%, far below the typical software or digital company, which usually exceeds 50%. Additionally, BigBear.ai has posted a negative free cash flow of $42 million over the past 12 months and has never seen positive cash flow. This suggests that, despite the rapid growth in the AI sector, BigBear.ai is struggling to keep up with its competitors.
In business, success depends not only on having cutting-edge technology but also on maintaining a competitive edge. While BigBear.ai may have some technological advantages, it doesn’t seem to be leading in its field. Combined with weak profit margins and negative free cash flow, this stock is a risky investment, especially after its massive price increase in the last year.
For investors, choosing stocks is not just about looking at short-term performance but also considering the company’s long-term growth and profitability. Both Palantir and BigBear.ai have achieved impressive gains, but their high valuations and weak profitability make them risky bets in the long run.
As renowned investor Charlie Munger puts it, "Price is what you pay; value is what you get." Investors should seriously consider selling these stocks at their current inflated prices, as the risks may outweigh the potential rewards.
For those still looking to invest in the AI sector, it is wise to focus on companies with solid fundamentals, strong growth potential, and a proven competitive edge. While AI technology will undoubtedly play a major role in the future, it is crucial to choose companies that are well-positioned to sustain their growth over time.
In conclusion, although Palantir and BigBear.ai have performed well in the past year, their current valuations make them dangerous investments. If you hold these stocks, it may be time to assess your position and consider making adjustments to your portfolio. The future of AI is bright, but it’s important to choose wisely and avoid stocks that have become overpriced.