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Excitement around artificial intelligence has pushed stock valuations higher.
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This key AI stock has a tight relationship with Nvidia, but it's still a very risky investment.
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This software giant offers key AI tools for enterprises, but its stock price has climbed far faster than its fundamentals.
Recent advances in artificial intelligence (AI) have led many businesses to look at how to incorporate the technology into their operations to improve earnings results. Out of the 500 companies in the S&P 500, 287 mentioned AI during their earnings call in the most recent quarter. That's up from less than 100 as of the end of 2022, when OpenAI's ChatGPT first came on the scene.
While investor excitement has pushed many AI stocks significantly higher over the last few years, some may have gotten ahead of themselves. Wall Street analysts see two of the biggest winners of the AI boom falling considerably over the next year, as the market isn't accounting for the risks involved in these investments.
Here are two AI stocks that could see their stock prices plummet up to 75%, according to select Wall Street analysts.
CoreWeave (NASDAQ: CRWV) specializes in renting GPU servers to artificial intelligence developers and helping larger hyperscale cloud providers meet their customers' demand for compute. One of CoreWeave's biggest investors is Nvidia (NASDAQ: NVDA), which owns roughly 7% of the company. That relationship ensures CoreWeave gets priority access to Nvidia's coveted GPU systems, making it a key supplier of compute for the industry.
Nvidia recently built on its relationship with CoreWeave, signing a contract to buy any unused capacity from CoreWeave as part of a $6.3 billion GPU purchase. That essentially gives the cloud computing company carte blanche to build out capacity, ensuring that its virtuous cycle of growth can continue through at least 2032, when the contract ends.
CoreWeave has grown quickly by taking on debt to build new data centers, which it outfits with Nvidia chips and then rents to customers in need of compute. The growing demand for AI compute enabled it to easily rent out its capacity, giving it more revenue, which it can use to raise more debt and build more capacity.
But even with Nvidia acting as a backstop, the stock comes with significant risks. For one, it has a huge customer concentration challenge. Microsoft represented 71% of its revenue last quarter. Meanwhile, Microsoft is building out its own capacity as fast as possible. And any drop in demand from Microsoft could significantly harm the virtuous cycle powering CoreWeave's growth. Nvidia's backstop will help, but the growth will completely sputter.