With the Nasdaq index in correction territory, many investors are trying to decide if it’s a buying opportunity or if they should run for the hills. A correction is marked by an index declining 10% from its all-time high, which isn’t quite as severe as a bear market. Additionally, stocks aren’t necessarily a blanket buy or sell right now. Instead, I think there are certain ones that look like great bargains and others that still seem overvalued.
Two stocks that I’m still not buying even after the sell-off are Apple (NASDAQ: AAPL) and Palantir Technologies (NASDAQ: PLTR). These are both incredibly popular stocks in the market, but I would need a further sell-off from them to consider buying, as they still have a very expensive price tag even after the drop.
Apple is one of the most recognizable consumer brands in the world and built a strong ecosystem around its iPhones. However, Apple has struggled to launch a game-changing product over the past few years, and its sales have been flat since 2022.
AAPL Revenue (TTM) data by YCharts.
Although Apple’s revenue is trending in the right direction, it’s only projected to grow revenue by a mere 4.6% in fiscal year 2025 (ending around September 30). That’s not quick growth by Apple and barely edges out the effect of inflation. In fact, Apple’s $378 billion in revenue in January 2022 has the same buying power as $424 billion in December 2024 (when its last quarter ended), according to the U.S. Bureau of Labor Statistics. This means that Apple’s growth over the past three years has fallen behind the rate of inflation, which isn’t a good sign.
Despite this, Apple still has a massive premium over its peers and the stock market.
AAPL PE Ratio (Forward) data by YCharts.
With the stock trading for nearly 30 times forward earnings, it’s still far more expensive than it has been for the better part of two years. It’s also valued at nearly 50% higher than the S&P 500, which trades at 21.2 times forward earnings. While brand value deserves some recognition, Apple’s growth is projected to be far below the average growth rate of the S&P 500 (10%), which is a big red flag for me.
Furthermore, other members of the Magnificent Seven are valued at much lower price tags (like Alphabet priced at 18.6 times forward earnings, Meta Platforms at 24.4 times forward earnings, and Nvidia at 25.7 times forward earnings), despite growing at a much faster rate. Alphabet, Meta, and Nvidia grew revenue at an 11.8%, 20.3%, and 77.9% pace, respectively, in their most recent quarters. So it doesn’t make a ton of sense to be buying Apple stock right now, as it’s still highly priced. As a result, I’d rather look at some of Apple’s peers than Apple itself.
Story Continues
Palantir is nearly the exact opposite of Apple in terms of growth. It makes AI-driven data analytics software used by both government and commercial entities. Its growth has been accelerating as the demand for its AI software ramps up, making Palantir one of the hottest stocks on Wall Street.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts.
That growth is expected to persist, with management guiding for $860 million in revenue in the first quarter, indicating a 36% growth rate. Palantir’s management has a track record of under-guiding and over-delivering, so don’t be surprised if this growth rate reaches nearly 40% when it reports Q1 results.
Despite this strength, Palantir’s stock has fallen over 30% from its all-time high, but I don’t think that decline is steep enough. The problem is that Palantir’s stock is so highly valued that even 40% growth over the next four years doesn’t justify the stock price.
If Palantir could grow its revenue at a 40% pace over the next four years (Wall Street analysts expect 32% and 26% growth in 2025 and 2026, respectively), it would have revenue of $11 billion. While that’s a large increase from the $2.87 billion in revenue it’s generating right now, it still isn’t enough from a profit standpoint.
Palantir’s current profit margin is about 16%, but let’s say it can increase that to 30%, which would place it among the best software companies in terms of profit margin. It would generate $3.3 billion in profits if it can do that. Still, even after monster growth that nobody is projecting and industry-leading margins, Palantir’s stock would still trade for 59 times forward earnings.
That’s a massive premium to pay for a stock, especially when you consider that the stock price can’t budge from today’s levels over the next four years to fulfill that projection.
With so much growth already baked into Palantir’s stock, it would have to fall a lot further before I’d consider taking a position in it.
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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. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
NASDAQ Correction: 2 AI Stocks That Aren’t Worth Buying on the Dip was originally published by The Motley Fool
