Palantir Technologies (NYSE: PLTR) rose to the top as one of the premier artificial intelligence (AI) stocks. Its prowess in AI software application is almost unmatched, which is why investors are so excited.

However, alongside this excitement has come inflated expectations, and I’m worried that even if the business succeeds, the stock could fall flat on its face due to the run-up it already experienced.

Can Palantir live up to these high expectations? Or are investors in for a rude awakening?

Palantir’s software is just starting to be adopted

Palantir’s software has been integrating AI with decision-making for a long time. It started in 2003 as a company focused on providing software to the government and has since expanded into the commercial sector. Its software was developed to streamline data flows and give decision makers the best possible information.

This program is incredibly useful, especially in high-stakes scenarios (like those found in government). And Palantir’s latest product takes this to a whole new level.

Its Artificial Intelligence Platform (AIP) gives developers the tools to integrate AI throughout a business, whether it be in apps for certain purposes or using AI to drive workflows and improve productivity.

This is exactly what many companies are looking for because AI is mostly being used as a tool on the side rather than directly integrated into workflows.

AIP has been a hit on the U.S. commercial side of the business, driving a second-quarter revenue increase of 55% to $159 million among these clients. Perhaps even more impressive was that its U.S. commercial customer count rose 83% from a year ago to 295.

This shows that there have been relatively few adapters of Palantir’s software, but there’s a reason for that: its cost. If we annualize the revenue and divide it by customer count, that gives an annual contract value of around $2.16 million. That’s a very expensive software package, and it limits potential clientele.

Still, that’s only a fraction of Palantir’s business. Its total second-quarter revenue was $678 million, up 27% from last year.

Although Palantir is a growing software company, it still knows how to turn a profit (a lesson it can teach some of its peers). The second quarter saw record profit margins, with earnings per share totaling $0.06.

But all of those great metrics come at a hefty price, which is why I’m not keen on buying Palantir’s stock right now.

Even if the business succeeds, the stock could struggle

Palantir is still working on achieving maximum profitability, so using an earnings-based valuation metric doesn’t do it justice. (The stock trades at 86 times forward earnings.)

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Instead, it’s better to project what Palantir’s valuation could be if it achieved margins similar to those of other mature software companies. Adobe is the industry standard for software companies, and its average profit margin over the past five years was 30%.

We need to establish a growth rate for the business. Wall Street analysts expect 24% growth in 2024 and 21% in 2025, but if we give Palantir the benefit of the doubt and say it can maintain its second-quarter growth rate of 27% for five years, that would give it annual revenue of $8.19 billion.

If it converts 30% of that into net income, it would generate $2.46 billion in profits. We get its ratio of price to five-year forward earnings by dividing its current market cap by this hypothetical profit.

This figure comes in at 27.8 times five-year forward earnings. What does Adobe trade for right now? It’s at 31.4 times forward earnings.

So Palantir must greatly exceed Wall Street expectations and achieve industry-leading profit margins for five years, and only then will it be valued at the same price another company is right now.

This just shows the extreme expectations built into the stock, which is why I’m not a buyer at these prices. There are too many other companies’ shares that can be bought for a reasonable price to justify buying Palantir right now, even if the underlying business will succeed over the same time period.

Should you invest $1,000 in Palantir Technologies right now?

Before you buy stock in Palantir Technologies, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $656,938!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

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Keithen Drury has positions in Adobe. The Motley Fool has positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.

Can Palantir’s Stock Live Up to Lofty Expectations? was originally published by The Motley Fool

During a Berkshire Hathaway shareholder meeting a few years ago, Warren Buffett and Charlie Munger were asked a straightforward yet revealing question: If someone in your local town owned three to five businesses, such as a cake shop and a dry cleaner, you’d probably think they were pretty well diversified. So why do financial experts often recommend holding 20 to 30 stocks in a portfolio? The questioner was curious about Buffett’s views on diversification and how he approaches concentrating his investments.

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Buffett didn’t hesitate to challenge the conventional wisdom. He made it clear that while owning a broad range of stocks is often recommended, it’s more of a safety net for those who don’t know how to evaluate businesses properly. “Diversification is a protection against ignorance,” Buffett said. “If you know how to analyze businesses and value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks.” In other words, if you’ve done your homework and truly understand a few outstanding companies, spreading your bets across dozens of stocks might dilute your returns.

Trending: The number of ‘401(k)’ Millionaires is up 43% from last year —Here are three ways to join the club.

Buffett isn’t just speaking theoretically. He practices what he preaches. At one point, he mentioned that he owns just one stock in his portfolio – the one he knows best. And when it comes to Berkshire Hathaway, he’s perfectly comfortable with concentrating investments in just a few stellar businesses. “I could pick out three of our businesses, and I would be very happy if they were the only businesses we owned and I had all my money in Berkshire,” he added.

Then Charlie Munger, never one to shy away from a blunt opinion, chimed in. He didn’t just challenge modern financial theories; he flat-out dismissed them. “Much of what is taught in modern corporate finance courses is twaddle,” Munger declared, eliciting laughter from the crowd. His point? Complex models and theories might sound impressive but often add little value to real-world investing.

See Also: Elon Musk and Jeff Bezos are bullish on one city that could dethrone New York and become the new financial capital of the US. Investing in its booming real estate market has never been more accessible.

Munger also emphasized the importance of sticking with what you know. “If you find three wonderful businesses in your life, you’ll get very rich,” he said. And unlike the intricate theories taught in finance classes, this approach is simple, straightforward, and, according to Munger, far more effective.

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Buffett and Munger’s advice is clear: If you truly understand the businesses you’re investing in, you don’t need to spread your money across dozens of stocks. Instead, concentrate on a few outstanding companies that you know inside and out. Diversification can help you avoid major mistakes, but it might also prevent you from achieving the extraordinary results of deep, focused investments in just a few high-quality businesses.

Trending: Will the surge continue or decline on real estate prices? People are finding out about risk-free real estate investing that lets you cash out whenever you want.

So, the next time you’re building your portfolio, remember Buffett and Munger’s wisdom. Don’t let the fear of risk lead you to dilute your potential returns. Instead, focus on finding those few great companies you understand and believe in – and then, as Munger might say, ignore the twaddle.

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This article Want to Get ‘Very Rich’? Charlie Munger and Warren Buffett Say You Only Need 3 Wonderful Businesses – Not 30 Stocks originally appeared on Benzinga.com

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Palantir Technologies (NYSE: PLTR) is quickly becoming the go-to provider of artificial intelligence (AI) software platforms for companies and governments around the globe. Evidence of this can be seen in the recent acceleration in the company’s growth as well as its improving revenue pipeline. Both metrics point toward better times ahead.

Investors are noticing and have been buying Palantir stock hand over fist. The stock is up an impressive 76% so far in 2024, and the following discussion offers clues as to why that has been the case.

Palantir’s AI software platform has gained impressive traction

When Palantir released its second-quarter results last month, the company reported a year-over-year increase of 27% in revenue to $678 million. That was a solid improvement over the 13% year-over-year growth the company delivered in the same period last year, as well as an acceleration over its Q1 revenue growth of 21%.

There was a nice jump in the company’s customer base, as well as the size of the deals that it has been striking with customers. Palantir management credited its improving growth profile to the growing adoption of its Artificial Intelligence Platform (AIP). This is a software platform that helps enterprises and governments integrate generative AI into their processes to help improve operational efficiency.

From helping customers build their own large language model (LLM)-powered applications to helping them accelerate their daily workflows with the help of generative AI, the usefulness of Palantir’s AIP seems to have struck a chord with customers. This explains why the company raised its 2024 revenue growth forecast and expects its top line to increase by 24% this year to $2.75 billion.

More importantly, Palantir seems capable of sustaining its outstanding growth in the long term, considering that it ended the previous quarter with $4.3 billion in remaining deal value (RDV). The metric refers to the total remaining value of Palantir’s contracts at the end of a period, and it rose 26% year over year in Q2.

This AI hardware giant is making strides in the AI software market

So, Palantir seems well on its way to making the most of the huge end-market opportunity available in the generative AI software market. However, there is another way for investors to capitalize on the booming demand for AI software, and a closer look could lead investors to think that it may be a better AI software stock than Palantir.

Nvidia (NASDAQ: NVDA) has been the go-to choice for companies looking to purchase high-end AI hardware so that they can train AI models, resulting in outstanding growth in the company’s revenue and earnings in recent months. What’s interesting is that CFO Colette Kress’ comments on the recent earnings conference call suggest that Nvidia is starting to make a dent in the enterprise AI software market as well. According to Kress, “We expect our software, SaaS, and support revenue to approach a $2 billion annual run rate exiting this year, with Nvidia AI Enterprise notably contributing to growth.”

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CEO Jensen Huang also commented, pointing out that customers can deploy Nvidia AI Enterprise software for $4,500 per graphics processing unit (GPU) per year. Given that Nvidia’s AI GPUs are priced at $30,000 or more for a single chip depending on the configuration, enterprise customers looking to build and deploy AI models are getting a good deal through Nvidia’s AI software platform.

Nvidia provides customers with multiple AI software offerings. For example, the company’s AI Foundry platform, which was launched in July this year, is an end-to-end solution with which customers can build and deploy custom generative AI models. Nvidia offers popular foundation models that can be tweaked by its customers and quickly move AI applications (including chatbots, content creation tools, and document processing tools) into the production phase.

Nvidia also provides pretrained customizable AI workflows that can be used for extracting data from PDFs or deployed for creating customer service workflows, accelerating drug discovery in the field of medicine, or building custom generative AI apps suited to an organization’s needs. What’s worth noting is that the adoption of Nvidia’s software solutions is increasing at a terrific pace thanks to AI.

In its February earnings conference call, Nvidia management pointed out that its software and services offerings reached an annual revenue run rate of $1 billion in the fourth quarter of fiscal 2024. So, the company’s software and services revenue run rate is set to double in the space of just one year. That’s significantly faster than the pace at which Palantir’s top line is set to grow this year.

Throw in the fact that Nvidia benefits big time from the booming demand for its AI chips, which led to 122% year-over-year growth in the company’s revenue in the second quarter of fiscal 2025 to $30 billion, and it is easy to see that the chipmaker is the more diversified play on AI. Another point worth noting here is that Nvidia stock trades at 28 times sales, which is lower than Palantir’s sales multiple of 29.

What’s more, Nvidia is the more attractive AI stock when we compare the earnings multiples of both companies.

So, investors looking for a cheaper alternative to Palantir to take advantage of the AI software market’s growth would do well to take a closer look at Nvidia, especially considering that the latter already has a flourishing AI hardware business that makes it a better growth stock to buy right now.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $630,099!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

Meet the Artificial Intelligence (AI) Stock That Could Become the Next Palantir, or Even Better was originally published by The Motley Fool

Super Micro Computer (NASDAQ: SMCI) is getting hit with another round of big sell-offs Friday. The company’s share price was down 5.5% as of 3:15 p.m. ET, according to data from S&P Global Market Intelligence.

Supermicro, as the company is sometimes called, saw its stock pull back following another bearish piece of coverage from a big name on Wall Street. Adding another source of selling pressure, today’s jobs report from the U.S. Department of Labor arrived with weaker-than-expected results.

J.P. Morgan no longer has a bullish rating on Supermicro stock

In a report published before the market opened today, J.P. Morgan lowered its rating on Super Micro Computer from overweight to neutral. J.P. Morgan’s analysts also lowered their one-year price target on Supermicro stock from $950 per share to $500 per share. Despite the downgrade, the new target would still suggest upside of roughly 28% based on the stock’s current price.

J.P. Morgan’s analysts said that the decision to downgrade the stock was not directly related to the short report that was published by Hindenburg Research earlier this month. They also said that the downward revision was not driven by concerns that Supermicro would have trouble getting back into compliance with Securities and Exchange Commission (SEC) regulations, following the delayed filing of its annual 10-K report. Instead, the rating and price-target cuts were driven by a seeming lack of near-term catalysts for new investors to jump into the stock, and concerns about sales and pricing pressures from competition.

The latest jobs data is also dragging Supermicro stock lower

Investors were looking to today’s jobs report from the Labor Department for indicators about the health of the U.S. economy, and they weren’t happy with the results. Analysts and economists had already started to lower their expectations for August’s jobs numbers; the average estimate was that 160,000 jobs were added last month. But the report showed that only 142,000 jobs were actually added in the period.

The August jobs numbers have added to concerns that the U.S. economy could be on track for a recession. The Federal Reserve is expected to cut interest rates later this month, which should be a positive catalyst for economic activity, but some observers are worried it may not be enough to avoid economic contraction. Investors have been looking to interest-rate cuts as a key bullish catalyst for the stock market, but the specter of a possible recession has taken the shine off of the Fed’s anticipated policy shift.

As a result, Super Micro Computer and other growth stocks are seeing outsized sell-offs today. But if you’re risk-tolerant, Supermicro stock could be a worthwhile addition to your portfolio.

Should you invest $1,000 in Super Micro Computer right now?

Before you buy stock in Super Micro Computer, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Super Micro Computer wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $656,938!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Why Super Micro Computer Stock Is Plummeting Today was originally published by The Motley Fool

When the word “semiconductor” is mentioned, it’s nearly impossible not to think of Nvidia (NASDAQ: NVDA) — and for good reason. Over the last five years, the company has grown its revenue and free cash flow by nearly 900% and 800%, respectively. With that level of growth, it’s no wonder industry analysts estimate that Nvidia holds at least 80% market share in the artificial intelligence (AI) chip realm.

By all accounts, Nvidia looks unstoppable. However, what goes up must eventually come down, right?

While analyzing Nvidia’s second-quarter earnings report, I stumbled across a metric that required a second look because I couldn’t believe what I saw. Specifically, I’m beginning to realize that Nvidia’s customer concentration trends might suggest the company’s growth could come to a screeching halt — and I think many investors could be caught off guard.

Let’s take a look at Nvidia’s customer concentration profile and explore why this is important to understand.

What is customer concentration, and why is it important?

Customer concentration measures a business’s revenue across its client roster. It helps answer questions seeking to hone in on how much sales are related to a specific customer or group of customers. For example, let’s say you have a business with 10 customers, and they collectively generate $1 million in annual sales. However, one customer is responsible for $500K. As an investor, would you be comfortable buying a business that relies on just one client for 50% of its annual revenue? Probably not.

What does Nvidia’s customer concentration look like?

In late August, Nvidia reported earnings for its second quarter of fiscal year 2025. Per the company’s 10Q filing, 46% of total revenue came from just four customers. That’s right — almost half of Nvidia’s $30 billion in quarterly revenue came from only four customers. Although quarterly business trends can fluctuate dramatically, a look at Nvidia’s historical customer concentration metrics could suggest the company’s growth is increasingly hinging on a particularly small cohort.

During Nvidia’s first quarter (ended April 28), the company noted that 24% of total revenue was attributed to two direct customers and that two indirect customers each accounted for at least 10% of revenue. One of these indirect customers actually purchased their products through one of Nvidia’s largest direct clients.

In its annual report for fiscal year 2024 (ended Jan. 28), Nvidia disclosed that 13% of total revenue for the year hailed from one customer (noted as Customer A). The company further informed investors that “one indirect customer which primarily purchases our products through system integrators and distributors, including through Customer A, is estimated to have represented approximately 19% of total revenue.”

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To put all this into perspective, Nvidia disclosed that no customer accounted for 10% or more of total revenue during fiscal years 2023 or 2022. Clearly, over just the last year or so, Nvidia has experienced soaring demand for its chips — but much of this growth seems to consistently come from a limited number of customers.

Why is this particularly worrisome for Nvidia?

It’s one thing to be concerned about rising customer concentration trends. However, looking at who this growth may be coming from brings an additional layer of alarm when assessing Nvidia’s growth prospects. While I cannot say for certain which companies are specifically in Nvidia’s top four, there are some good reasons to believe that much of the company’s growth can be traced back to the “Magnificent Seven” members.

Over the last year, executives such as Mark Zuckerberg and Elon Musk have cited that Meta and Tesla are aggressively buying Nvidia’s highly popular H100 graphic processing unit (GPU). This is great news at face value. Being the AI chip of choice for two of the world’s largest technology enterprises is more than just a nod of approval. However, investors shouldn’t be jumping for joy.

During Tesla’s second-quarter earnings call earlier in the summer, Musk gave some heavy signals that the company may seek to compete with Nvidia down the road. Moreover, Meta has been increasing its investments in capital expenditures (capex) — and not all of that is good news for Nvidia. Meta has developed its own chip, dubbed Meta Training and Inference Accelerator (MTIA), in an effort to move away from such a heavy dependence on Nvidia. On top of this, e-commerce and cloud computing juggernaut Amazon has also doubled down on its own AI roadmap — part of which includes developing its own training and inferencing chips.

To be clear, I don’t see the rising competition as an Achilles’ heel for Nvidia. Even if big tech begins to scale down their orders from Nvidia, I surmise the company will have little trouble finding new business. The real concern is that I think Nvidia will lose pricing power as more players enter the chip realm. So, even though Nvidia will likely still generate solid growth, I think the days of triple-digit revenue and profit acceleration could be nearing a close.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $630,099!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

Is Nvidia Really as Popular as You Think? 1 Number That Has Me Concerned About the Company’s Long-Term Prospects. was originally published by The Motley Fool

• Investors continued to sell Nvidia stock, sending the chipmaker 4% lower on Friday.

• Shares are on track to end the week 14% lower amid news of an antitrust probe.

• The stock is flirting with $100 a share, a key technical threshold watched by analysts.

Nvidia stock extended its post-earnings decline on Friday, with shares of the chip maker flirting with a key technical level amid a wider tech sell-off in the session.

Nvidia shares slid over 4.5% on Friday, trading around $102.15 a share. That puts the stock close to a key psychological threshold of $100 a share and its 200-day moving average just below $90.

Traders are eyeing those levels for signs that the chip titan’s blistering rally may be fading, analysts told Business Insider this week. Wall Street, though, generally remains bullish on the outlook for the stock, of which analysts have projected an average price target of $153 a share, according to Nasdaq data.

Investors have been cautious on Nvidia stock since the company posted second-quarter financials that beat earnings estimates but not quite enough to meet the loftiest expectations.

The stock staged a small recovery earlier this week, but continued its steep sell–off after a report from Bloomberg that said the Department of Justice was probing the company over antitrust concerns.

“While every case is different, we also highlight the plethora of govt. cases ongoing against other large US tech companies over the last several years. Until we have more details, we assume no specific material impact on NVDA’s fundamental opportunity,” Bank of America strategists said in a note, reiterating their “buy” rating on the stock.

Nvidia has lost around $500 million in market value from levels in early June, with the firm being valued at $2.53 trillion on Friday. The stock is on track to end the week 14% lower, though shares are still up 111% from levels at the start of the year.

The slide on Friday came amid a larger decline in tech, with the Nasdaq Composite down 2.5% at 2:00 p.m. ET. Investors were fleeing high-flying growth names after the August jobs report was weaker than expected, sparking new fears about an economic slowdown.

Read the original article on Business Insider

Looking at analyst price targets, you might find some undervalued stocks. However, you’ll often find a stock that looks like it has a lot of upside, but only because its price has fallen sharply and analysts haven’t put through their updated price targets (i.e., downgrades) for it yet.

Three stocks that look like they might be great buys today based on their consensus analyst price targets include PDD Holdings (NASDAQ: PDD), Intel (NASDAQ: INTC), and MicroStrategy (NASDAQ: MSTR). But here’s why you might want to hold off on buying these stocks right now and why analysts could downgrade their price targets for them in the near future.

PDD Holdings

If analyst projections prove accurate, you could be sitting on a potential 80% return if you buy shares of PDD Holdings today. The Chinese-based company owns Pinduoduo and Temu, one of the hottest e-commerce sites in the world.

While the company’s recent earnings numbers were strong, they failed to meet Wall Street’s expectations, leading to a sell-off. Pinduoduo’s growth rate was impressive for the quarter ending in June, with sales up 86% year over year, but it still failed to meet the high expectations analysts have for the stock. An earnings miss is just part of the reason you may want to temper your expectations for the stock.

Downgrades could be coming if the U.S. government decides to close a tariff loophole that many Chinese online retail sites have been taking advantage of, using it to offer dirt cheap products to consumers. That could make items more expensive on those sites and hurt the growth prospects of PDD Holdings.

Given Temu’s popularity, PDD could still make for a good investment in the long run, but investors shouldn’t assume the stock is going to skyrocket in the near future.

Intel

Analyst downgrades were pouring in for Intel after the tech company reported disappointing earnings numbers in August. Based on the consensus, though, the implied upside for the stock is still more than 50% right now. But with the company in the midst of restructuring and working to try to grow its business while also making its foundry operations profitable, investors who buy the stock today will need to take a leap of faith in the company’s management as this is a highly risky investment to own right now.

Shares of Intel are down around 60% this year, and if not for such a deep sell-off, the implied upside based on price targets wouldn’t look nearly as high as it does. There’s not much optimism around Intel these days. Even though it’s trading at multiyear lows, doubts about its ability to be profitable and compete in the chip market make it probable that there will be more downgrades to come for the stock. Given its volatility, investors may be better off taking a wait-and-see approach with the stock.

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MicroStrategy

The one stock on this list that may be the most likely to hit its lofty price targets is MicroStrategy. But that’s not because the software company has incredible products or growth prospects. Its performance links back to how well Bitcoin does. If the cryptocurrency rises, MicroStrategy’s stock could go along for the ride. MicroStrategy is the largest corporate holder of Bitcoin and now refers to itself as “the world’s first Bitcoin development company.”

However, MicroStrategy’s exposure to Bitcoin also makes it an incredibly risky investment, and gains and losses on its crypto assets can have a significant impact on MicroStrategy’s earnings numbers. In the most recent period, which ended on June 30, the company incurred digital asset impairment losses of $180.1 million — more than the $111.4 million in revenue it generated during the quarter.

Bitcoin has been struggling in recent months, and it may not be the safe haven many investors assumed it might be. Amid more challenging economic conditions, it could struggle and downgrades could be inevitable for crypto stocks like MicroStrategy, which are increasingly dependent on Bitcoin’s valuation.

Right now, analysts expect MicroStrategy stock to rise by an average of around 60% over the next 12 months. But investors shouldn’t be surprised to see downgrades coming for the stock, especially if there’s a recession next year.

Should you invest $1,000 in PDD Holdings right now?

Before you buy stock in PDD Holdings, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and PDD Holdings wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $630,099!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 3, 2024

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.

Don’t Rely on These Analyst Price Targets: More Downgrades Could Be Coming for These 3 Struggling Stocks was originally published by The Motley Fool