Shares of CoreWeave and Palantir Technologies have seen extraordinary gains in recent months, prompting comparisons to meme stocks.
CoreWeave’s share price has quadrupled since its downsized initial public offering in March, while Palantir’s stock has surged over 470% in the past year.
Investors are hoping these companies will mirror Nvidia’s success in the artificial intelligence era.
However, some fear they may follow the trajectory of retailer GameStop, which plunged 66% from its 2021 peak after a speculative frenzy.
Overlooking fundamentals to chase trends?
In a Bloomberg report, experts warned that retail traders are overlooking financial fundamentals in favour of trend-chasing.
“Investors are ignoring fundamentals just to jump on the trend, and if you stretch a rubber band, the snapback can be substantial,” said Steve Sosnick, chief strategist at Interactive Brokers Group in the report.
“You need fresh money to reinforce the trend, otherwise the moves aren’t sustainable.”
CoreWeave’s sudden 17% drop last week highlighted the volatility of these stocks.
However, the company quickly rebounded and is approaching another peak.
AI trade fuels demand
CoreWeave and Palantir have benefited from the growing AI industry, with tech giants investing heavily in computing infrastructure.
CoreWeave provides cloud-computing services and counts Microsoft Corp. among its key clients.
Meanwhile, Palantir offers data analysis software used by government and corporate customers.
Despite the parallels to GameStop, both companies are experiencing genuine demand.
Bloomberg analysts predict CoreWeave’s revenue will more than double this year, while Palantir’s earnings may rise by 36% due to increased AI-related sales.
Concerns over valuation
However, the high valuations of these stocks still raise questions.
Palantir’s price-to-sales ratio stands at 71, making it the most expensive stock in the S&P 500.
CoreWeave, which reported a net loss of $315 million in the first quarter, is priced at 10 times its projected sales, far above the S&P 500 average of around 3 times.
Retail investors appear undeterred by these figures, continuing to pile into CoreWeave and Palantir.
Data from Interactive Brokers confirms these stocks are among the most traded by retail clients.
Retail traders show increasing comfort with higher-beta plays
Vanda Research has observed a growing trend among retail investors toward speculative stocks, particularly those linked to AI.
“Mom-and-pop traders appear increasingly comfortable venturing into higher-beta plays, from small caps to second-derivative AI themes,” wrote Marco Iachini, senior vice president of research, in a note published last week.
“Sentiment appears overwhelmingly positive for those with strong recent momentum or AI exposure.”
The respective rallies being witnessed by the two companies are not without reason.
Nvidia recently disclosed a sizable stake in CoreWeave. CoreWeave also expanded a deal with OpenAI and entered into two lease agreements with Applied Digital Corp.
On the other hand, Palantir has reported strong revenue forecasts in recent quarters and is reportedly winning more US government contracts from the Trump administration.
Lessons from past AI stocks
Despite the hype, investors have previously faced losses from speculative AI stocks.
Super Micro Computer Inc. experienced a dramatic rise before losing over 80% of its value due to accounting concerns.
Similarly, BigBear.ai Holdings Inc. and SoundHound AI Inc. saw sharp rallies followed by steep corrections.
“Clearly meme investing is back, but you’re playing with fire if you try to trade stocks like these,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management.
“That’s why we won’t own something like CoreWeave. It is so way, way overvalued that there’s no way we could be comfortable in it.”
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