2 Popular AI Stocks to Sell Before They Fall 46% and 73%, According to Wall Street Analysts

Key Points

• Palantir and Arm Holdings have been fantastic investments in recent years, but certain Wall Street analysts believe the stocks are wildly overvalued today.

• Palantir has reported accelerating revenue growth in eight consecutive quarters, but it's the most expensive stock in the S&P 500 by a wide margin.

• Arm has rapidly taken share in data centers as companies prioritize power-efficient server CPUs, but it's the third-most expensive stock in the Nasdaq-100.

• 10 stocks we like better than Palantir Technologies ›

Shares of Palantir Technologies (NASDAQ: PLTR) have returned 2,570% since the artificial intelligence (AI) boom began in earnest in January 2023. Arm Holdings (NASDAQ: ARM) did not go public until September 2023, but shares have since advanced 195%. Those gains have left both stocks trading at rich valuations, so much so that certain Wall Street analysts recommend selling.

• Rishi Jaluria at RBC Capital has set a target price of $45 per share for Palantir. That implies 73% downside from its current share price of $171.
• Javier Correonero at Morningstar has set a target price of $80 per share for Arm. That implies 46% downside from its current share price of $150.

Here's what investors should know about these popular AI stocks.

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Image source: Getty Images.

Palantir Technologies: 73% implied downside

Palantir introduced its Artificial Intelligence Platform (AIP) in April 2023. It serves as a large language model organization tool that complements its core data analytics platforms by letting developers integrate generative AI into applications and workflows. The product has been an unmitigated success, such that sales growth has accelerated in eight consecutive quarters.

Palantir's advantage lies in its unique ontology-based software architecture. In this context, an ontology is a framework that integrates an organization's data, assets, and actions into a digital twin that supports decision-making. It also captures the outcome of every decision and feeds the information back into the models, which creates a feedback loop that leads to better insights over time.

International Data Corp. ranked Palantir as the market leader in decision intelligence platforms last year. That bodes well for the company. Grand View Research estimates that data analytics software sales will increase at 29% annually through 2030. "The main factors propelling the data analytics industry expansion are the growing adoption of machine learning and artificial intelligence," according to the report.

However, Palantir is one of the most richly valued software stocks in history. It currently trades at 126 times sales, which makes it the most expensive stock in the S&P 500 by a long shot. The second-most expensive stock is Texas Pacific Land at 29 times sales. That means Palantir would still be the most expensive stock in the index even if it lost 75% of its value.

In that context, it is entirely plausible that Palantir will suffer a major meltdown at some point in the future. Prospective investors should avoid the stock or, at the very least, keep any positions very small. Current shareholders with a substantial percentage of their portfolios invested in Palantir should consider trimming their positions.

Arm Holdings: 46% implied downside

Arm has long dominated the market for mobile device processors due to its power-efficient architecture. Its central processing units (CPUs) are found in 99% of smartphones. But that quality, coupled with the flexibility of its licensing model -- Arm does not make chips, but rather licenses blueprints to customers who develop custom chips -- has also helped it gain market share in data centers.

Major technology companies, such as Alphabet, Amazon, Apple, and Microsoft, have designed Arm-based server processors. And Nvidia's Grace Blackwell Superchip pairs two Blackwell GPUs with an Arm-based Grace CPU. In total, Arm has added about 10 percentage points of market share in data centers in the last two years, while Intel has lost about 16 points. AMD has also gained share, which accounts for the difference.

That trend is likely to continue as companies look to curb operating costs associated with AI infrastructure by deploying more power-efficient server processors. CEO Rene Hass recently said AI is "driving unprecedented demand for compute that's not only performant, but also energy efficient. And Arm is the only compute platform built to deliver."

However, Arm currently trades at 94 times adjusted earnings. That is particularly expensive for a company whose earnings are forecasted to increase at 23% annually through fiscal 2027. Those figures give Arm a price/earnings-to-growth (PEG) ratio above 4, which is traditionally seen as overvalued. Moreover, Arm trades at 39 times sales, which makes it the third-most expensive stock in the Nasdaq-100, behind Palantir and Strategy.

I doubt Arm shares will decline 46% unless the broader market drops sharply, but the stock is very expensive. Investors should wait for a better entry point before putting money into this semiconductor company. Personally, I would feel more comfortable buying at $120 per share, though the valuation would still be stretched even at that price.

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Trevor Jennewine has positions in Amazon, Nvidia, and Palantir Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short November 2025 $21 puts on Intel. The Motley Fool has a disclosure policy.