Palantir Technologies (NYSE: PLTR) has been one of Wall Street’s hottest artificial intelligence (AI) stocks this year. Shares have surged over 150% in 2024 amid enthusiasm about AI, encouraging financial results, and the company’s inclusion in the S&P 500 (SNPINDEX: ^GSPC).
Somewhat surprisingly, Wall Street is overwhelmingly bearish after that tremendous price appreciation. Among the 23 analysts that follow Palantir, the median price target is $27 per share, which implies 38% downside from its current share price of $43.50. In other words, most analysts believe Palantir is overvalued.
Here’s what investors should know about the company.
The bull case: Palantir is a leader in artificial intelligence software
Palantir helps businesses make sense of data. Its primary platforms, Gotham and Foundry, let users ingest information, develop machine learning models, and surface insights with analytical applications that improve decision-making. The company has also introduced its Artificial Intelligence Platform (AIP), which brings support for large language models and generative AI to Gotham and Foundry.
Some analysts have praised Palantir. In August, Forrester Research recognized its leadership in machine learning and artificial intelligence platforms. “Palantir is quietly becoming one of the largest players in this market,” analysts wrote. And Palantir achieved the highest ranking in Dresner Advisory Services’ most recent report on artificial intelligence, data science, and machine learning software vendors.
However, other analysts are less impressed. Gartner scored Palantir below a dozen other vendors for its data integration tools, and did not even consider Palantir in its latest report on data science and machine learning platforms. And last year, RBC Capital analyst Rishi Jaluria opined that Palantir’s software “does not appear to be anything truly differentiated when it comes to generative AI.”
Those disagreements notwithstanding, Palantir reported encouraging financial results in the second quarter. Its customer base increased 41% and the average customer spent 14% more. In turn, revenue rose 27% to $678 million, the fourth straight acceleration, and non-GAAP earnings surged 80% to $0.09 per diluted share.
CEO Alex Karp ascribed those strong financial results to demand for AIP, and he gave upbeat insight about the future. “The persistent and unbridled demand for our software, for an effective enterprise platform that makes artificial intelligence capabilities useful to large institutions, shows no sign of relenting,” he wrote in his recent shareholder letter.
The International Data Corp. (IDC) estimates AI platform spending will grow at 41% annually through 2028. Meanwhile, Grand View Research estimates the data analytics software market will grow at 27% annually through 2030. Palantir is well positioned to capitalize on those opportunities, though analysts disagree about the extent to which the company will benefit.
The bear case: Palantir stock trades at an absurdly expensive valuation
Palantir stock had climbed 55% year to date by Aug. 6, the day after the company reported second-quarter financial results. That share price appreciation was arguably justified by solid execution and the massive opportunity surrounding its AIP product. But shares have continued to trend higher since then, often without good reason.
Palantir stock jumped 14% in a single day in September when S&P Global announced that the company would join the S&P 500. Inclusion in the index was certainly validating, but it did not fundamentally change Palantir. The company will neither earn more revenue nor become more profitable because it was added to the S&P 500, so the subsequent price appreciation — which now totals 44% — seems quite irrational.
Moreover, Wall Street expects Palantir’s adjusted earnings to increase 22% over the next year. That makes the current valuation of 137 times adjusted earnings look absurd. Those numbers give it a PEG ratio above 6. For context, PEG ratios below 1 are generally considered cheap, while PEG ratios between 1 and 2 may be viewed as reasonable.
Personally, I see only two possible outcomes. Either Palantir justifies its current valuation with faster-than-expected earnings growth, or the share price suffers a major correction at some point. In both scenarios, the stock is a risky investment best avoided right now.
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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies and S&P Global. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
Should You Buy Palantir Stock? Wall Street Gives a Clear Answer That May Surprise Investors. was originally published by The Motley Fool
