After a solid run, it might be time to consider cashing in some gains.
The current bull market is now in its fourth year, showing remarkable strength. Growth stocks have been the main drivers, with the S&P 500 up 88% since hitting the low in October 2022, especially gaining momentum after the correction in April.
Yet, not all high-growth stocks are expected to keep producing those impressive returns. Some analysts suggest that a few of this summer’s top performers might see significant declines next year.
Let’s take a look at two growth stocks that could potentially drop by as much as 75%, according to insights from leading Wall Street analysts.
1. Palantir Technologies (75% potential decline)
Palantir Technologies (PLTR) is enjoying remarkable growth in its software sector, mainly due to innovations in AI and the introduction of artificial intelligence platforms (AIPs). Their platform assists government bodies and businesses in connecting various data sets, which can enhance decision-making. The AIP adds a sophisticated language model on top that enables even non-tech users to leverage the platform using everyday language.
The impact of AIP on their business is substantial. With a wider array of applications and a growing customer base, commercial sales at Palantir have surged. In the second quarter, U.S. business clients spent 93% more compared to the same timeframe last year, and overall revenue climbed by 48% during that quarter.
Still, CEO Alex Karp prefers a streamlined approach, concentrating on product development while letting advancements in AI and word of mouth handle marketing. This strategy resulted in a strong operating margin, with adjusted operating margins reaching 46% in the last quarter—yielding a solid Rule of 40 score of 94.
However, it’s clear that the stock price is steep. Some may argue that Palantir’s growth at its current scale is unprecedented, but the potential forward P/E near 300 and a P/S ratio above 100 are hard to justify. Analysts at RBC Capital are cautious, setting a price target of $45, indicating a 75% downside from the current valuation. They express concern over an unfavorable risk-reward scenario, pointing out that any signs of earnings or sales growth disappointment could lead to a sharp decline.
2. Coinbase Global (46% potential decline)
Coinbase Global (COIN) operates as a prominent cryptocurrency exchange, notable for its reliability and regulatory compliance, making it a popular choice among retail investors. Their business heavily relies on transaction fees, which can be higher than average.
Coinbase profits when users trade, and typically, individual investors engage in more trading as asset prices rise. Earlier this year, Coinbase benefited from Bitcoin reaching an all-time high.
However, after a strong first quarter, trading volumes dropped significantly in the second quarter as crypto prices stagnated. Although Coinbase has other revenue channels, such as USDC stablecoin interest and subscriptions, growth in those areas was minimal—with only a 3% increase in total revenue from their crypto debit card in the last quarter.
Moreover, Coinbase faces mounting competition from both new exchanges and established financial players. It may encounter pressure to raise take rates in crypto trading as regulatory clarity emerges around the asset class. This could hinder revenue growth and profit margins, even if investor adoption increases.
The price target set by analysts is around $185, suggesting a 46% drop based on current share prices, although that assessment was made a year ago, prior to the presidential election. Morningstar has recently appraised the stock at $205, which is still about 40% lower than its current value. The stock is trading at over 45 times forward earnings estimates, coupled with a lot of uncertainty around those projections, which makes it potentially wise to consider taking some profits.
