Apple, Palantir Investors Fear Overvaluation Despite Strong Results

Wall Street's current earnings season is raising questions about how the market perceives the artificial intelligence revolution. While AI buzzwords previously propelled stocks upward, recent reports indicate a shift towards a testing phase, focusing on return on investment, economic viability, and profitability. Hardware giants are facing supply chain and component cost bottlenecks, while software companies exhibit mixed performance, with some soaring and others faltering. Major corporations are balancing financial discipline with the fear of falling behind in the AI race.

Apple's latest report showed record sales in China, up 21% quarterly and 28% annually, driven by strong demand for premium devices and delayed price increases against competitors. However, this success couldn't mask underlying issues: a relatively high stock valuation, declining gross profit margins due to rising memory chip costs, and a slowdown in the profitable services division, which faces significant regulatory pressure and legal battles, including efforts to bypass app store commissions. The quarter also saw a leadership change, with John Ternus succeeding Tim Cook as CEO. Despite new product launches, Ternus faces lowered expectations and pressure to manage profitability amid supply constraints and extended wait times for new foldable devices. Apple's cautious approach to AI investment, prioritizing stock buybacks over massive AI spending, positions it as stable but potentially less competitive. The "Siri AI" launch was considered a disappointment compared to rivals' offerings, potentially reducing upgrade incentives. Violetta Tudorova, Senior Research Analyst at Leverage Shares, noted that Apple's stock decline stems from concerns about profitability amid high expectations, not weak product demand. The company forecasts a gross profit margin of 45%-46%, down from 47.9%, and anticipates an 8%-9% slowdown in services growth, below market expectations. Tudorova stated, "Apple is priced like a safe haven stock, and at such a valuation, even a moderate hit to profit margins can be more significant than beating revenue forecasts." The ability of iPhone demand to offset rising component costs and AI expenses remains a key question, with potential for stock stagnation if margins continue to erode.

Palantir's stock has surged nearly 900% in three years, reaching a market value exceeding $400 billion. Its recent quarterly report showed a 96% revenue increase to $2.31 billion, with U.S. commercial revenue surpassing government revenue for the first time. Despite raising its annual forecast, the stock fell in after-hours trading due to a perceived slowdown in growth rate to 15% for the next quarter, down from 20% previously. Investors also noted a decrease in future order backlog, with 212 deals worth $2.9 billion closed, compared to 220 deals worth $3.4 billion in the prior quarter. Palantir faces structural challenges, including potential competition from model providers like OpenAI and Anthropic offering lower-cost data analysis, and European pressure to cancel contracts due to privacy and military ties, particularly concerning Israel.

The broader semiconductor market is also under scrutiny. Nvidia's stock has dropped about 15% recently, erasing hundreds of billions in market value, as investors observe a dramatic decline in free cash flow for major clients like Meta, Google, and Amazon due to capital expenditures. There's a fear that cloud giants might halt chip purchases by 2027. Intel faces a more complex situation, with its traditional PC market hampered by rising component costs, while demand for its server processors for data centers requires shifting production resources, impacting its foundry business. Sergey Vashchuk, Senior Analyst at Oppenheimer, commented that AI investments have become excessive, leading to cash burn even in large companies like Amazon, Meta, and Google. He expressed concern that actual investments in data centers might be lower than market valuations due to rising input costs and physical constraints like electricity and construction, delaying necessary infrastructure expansion. Vashchuk added that the high valuation of chip stocks, relative to both the general market and their own historical levels, contributed to the negative reaction to earnings reports. This has led to a market rotation towards software companies that burn less cash. The current trend is the reverse of the first half of the year. The sharp stock declines are not coincidental; as Apple hesitates on capital expenditures, Palantir faces investor concerns, and tech giants burn cash, the chip market realizes that the era of buying chips at any cost may be ending. Vashchuk believes that while demand plans extend to 2028, investors anticipate a normalization of demand due to unsustainable cash burn rates, which will directly impact chip orders. He also cited supply chain bottlenecks, component shortages like memory chips leading to price increases, and growing competition, with many trying to challenge Nvidia's dominance.