Over the past year, investments tied to artificial intelligence (AI) have become extremely profitable, with the market value reaching trillions of dollars. The surge in AI stocks has significantly boosted the stock market as companies seen as AI winners experience increasing prices. In fact, a majority of the world’s largest corporations are either directly involved in AI or heavily investing in it, making their future profits largely dependent on this rapidly expanding field. So far, AI has been delivering on its promise, with stock prices reaching record highs.
Amidst all the buzz and anticipation, it seems some AI stocks have been inflated beyond their actual worth. History has shown us that periods of intense enthusiasm often precede periods of correction, as the hype surrounding a new technology can lead investors to overestimate future growth potential. This inevitably results in disappointment when the growth doesn’t meet the exaggerated expectations set during the boom. With this in mind, I would recommend cautiously considering the possibility of selling these two AI stocks amidst the current boom.
Palantir’s extreme valuation
It’s possible that the most sizzling AI stock currently is Palantir Technologies (PLTR). This AI software provider for the US government and big corporations boasts a market capitalization of $363 billion, positioning it as the 24th-largest company globally at this moment.
The company’s AI solutions are gaining traction swiftly, leading to a significant expansion. In the latest quarter, revenue surged by 39% compared to the same period the previous year. This increase was fueled by a 55% rise in U.S. revenue and an impressive 71% growth from U.S. commercial clients. Major corporations are sealing substantial agreements with Palantir; they’ve already finalized 139 deals worth over $1 million, just within the first quarter. This thriving software startup boasts a 20% operating income margin, making it profitable.
In simpler terms, regardless of the validity of various factors, it might not make a difference for an investor looking to buy the Palantir stock today. This is because, while Palantir managed to generate $3.1 billion in revenue over the last 12 months, its market capitalization stands at a whopping $363 billion. Consequently, this high valuation translates into an extremely elevated price-to-sales (P/S) ratio of 123 compared to similar sized companies in history.
Let’s examine some figures to demonstrate why Palantir’s stock may be overpriced. If we assume that Palantir maintains its current growth rate of 39% for the next five years, it could increase its revenue to approximately $16 billion. Given this growth, if we also project that the company’s profit margin will expand to 30%, it would be generating nearly $5 billion in earnings in five years. This translates to a price-to-earnings (P/E) ratio of about 72.6. Even with continued rapid expansion for another five years, the stock would still be trading at a significantly high earnings multiple.
In simpler terms, the performance of Palantir’s shares may not meet expectations in the near future. Therefore, it might be wise to think about cashing out your shares of this popular stock now.
BigBear.ai’s slow growth
At a quick glance, BigBear.ai (BBAI) appears comparatively reasonably priced compared to Palantir. With a Price-to-Sales (P/S) ratio of 13, it could potentially expand significantly if its AI-driven intelligence solutions are successfully implemented across the U.S. markets. If successful, it might outgrow its current market capitalization of $2.4 billion at an $8 share price.
The main issue lies in the slow pace of growth for the company, as its annual revenue increase was merely 5%, amounting to $35 million, despite an increased spending on AI. Notably, BigBear.ai faces direct competition with Palantir and appears to be struggling against this larger competitor. The company continues to struggle in achieving profits, reporting a loss of $21 million in operating expenses for the last quarter, while generating only $35 million in revenue. To continue operations, it has resorted to issuing more stocks through public offerings, leading to an increase of 100% in the number of shares outstanding since its initial merger with a Special Purpose Acquisition Company (SPAC).
Management boasts about agreements with the Department of Defense, including a recent contract to modernize the Joint Chiefs of Staff, but this contract amounts to $13.4 million over 3.5 years. This deal is unlikely to significantly impact BigBear.ai’s business in the near future.
Despite the stock surge, BigBear.ai might not be the best choice for investment during a technology boom. The company’s revenue growth is sluggish, it’s falling behind competitors, and it’s spending heavily. Given these factors, you may want to contemplate selling off your BigBear.ai shares after its recent price hike. The fact that it has ‘AI’ in the name doesn’t guarantee it’s a smart investment choice.
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2025-07-23 12:05