Key insights
- The article identifies Palantir, AMD, and Apple as potentially overvalued AI stocks, despite the general AI sector being reasonably valued. It uses the forward P/E ratio to assess these companies, noting Palantir's exceptionally high valuation. The author suggests that while these companies have strong growth prospects, their current stock prices may not be justified, implying a potential downside risk for these specific equities and a cautionary signal for investors in the AI space.
"Overvalued" and "artificial intelligence (AI) stocks" are two phrases that seem to go hand in hand. But when you analyze the market, these stocks are reasonably valued for the most part. However, I have a few that I believe have gotten ahead of themselves, and investors should consider steering clear or selling some shares to buy more reasonably valued stocks.
In my opinion, Palantir (PLTR 5.50%), AMD (AMD +1.82%), and Apple (AAPL 1.10%) are all a bit overvalued. The range of overvaluation varies between these three, but I still think there are far better AI stock picks.
To assess each stock, we'll utilize the forward price-to-earnings ratio, as it combines growth projections with valuations. That's important because most of these stocks are growing at a rapid pace.
Palantir trades for an astounding 98 times forward earnings. That's a major premium price tag, but it has earned part of that premium due to its impressive growth rate, which only continues to move higher. However, the question is how long Palantir can sustain it. Wall Street analysts expect 80% growth next quarter and 69% growth in the quarter after that. For 2026, they expect 73% growth overall and 45% in 2027.
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At nearly 100 times forward earnings, Palantir needs to triple its earnings beyond 2026's results to get to a more reasonable valuation range. Palantir would need to sustain its projected 45% growth rate for three years to reach that mark. With growth through 2029 already baked into the stock, that's just too great a price to pay, especially when several stocks are growing as fast as Palantir but trading at far cheaper levels.
AMD is another stock that some investors may be shocked to find on this list (alongside Apple). However, when you examine it, it's hard to deny the case.
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AMD isn't that far away from Palantir's price point, yet it's growing far more slowly. This makes AMD's stock suspect, and management believes that this 35% growth rate is exactly what investors should expect over the next five years. It will take a long time for AMD's stock to reach a reasonable valuation, although it could do it a bit quicker than Palantir due to its earnings growing faster than revenue.
AI demand is likely to persist for a while, which will help AMD's growth rate sustain itself. But with so much success already priced in, I believe investors can find other AI stocks with more upside.
Apple may be the most shocking inclusion on this list, but I stand by it. Among the big tech stocks, Apple is the most expensive.
While Apple has earned a premium for being a top-notch executor, it's going through a CEO transition later this year and is obviously behind in the AI rollout race. I don't think it warrants a premium valuation, and with lackluster growth rates compared to its peers, it will take a while to grow into that premium. (Note: Nvidia was removed from this graph because it skews the growth rates so much.)
Apple has the slowest revenue and earnings-per-share growth rate of its peers (for reference, Nvidia grew revenue and earnings per share by 85% and 213%, respectively). Normally, slow growers and the highest premium don't belong together, yet that's what we see with Apple.
As a result, I believe there are far better picks out there, and Apple could struggle to match returns over the next few years.