Palantir Technologies (PLTR) has positioned itself as a leading stock in the artificial intelligence (AI) market. The cloud software company provides data analytics platforms that enable governments and businesses to connect data points that might otherwise be overlooked. Founded in 2003 in the aftermath of the September 11 attacks, Palantir initially gained traction with intelligence agencies. After establishing a strong presence within the federal government, the company has recently seen increased interest from commercial clients, which has drawn the attention of investors.
The company’s stock has surged over 140% this year, attributed to its shift toward profitability, inclusion in the S&P 500, rapid margin expansion, and accelerated revenue growth. In the current AI-driven era, Palantir is emerging as a frontrunner, with management anticipating a minimum 47% increase in U.S. commercial revenue for the year. Despite this growth, Wall Street analysts are gradually turning cautious on Palantir, noting that its share prices have become relatively expensive.
Currently, Palantir’s stock is trading at a price-to-sales (P/S) ratio of 40, which has escalated in tandem with its stock price over the past year. This rise in stock value is primarily due to multiple expansions rather than the intrinsic growth of the business. Multiple expansions are often driven by heightened investor expectations, an appropriate observation considering Palantir’s recent profitability based on generally accepted accounting principles (GAAP). However, analysts have started to reassess the company’s valuation, considering it less bullish recently.
According to Tipranks, analysts predict a 33% decrease in Palantir’s value shortly, with an average price target of $27.85. Analysts are divided on the future of the stock, with four rating it as a buy, seven recommending holding, and six advising selling. The highest price target from Bank of America is just $50, indicating skepticism about the stock’s continued rise, which contrasts with the more optimistic outlook for other tech companies like Nvidia.
Palantir’s current valuation is high, marked by a P/S ratio of 40. Historically, when tech stocks saw similar valuation inflations during the pandemic, it resulted in a challenging bear market. Some investors speculate that the market may be experiencing an AI bubble due to significant investments in AI hardware by major tech companies such as Microsoft and Alphabet, aiming to advance artificial general intelligence capabilities. Palantir’s growth suggests a rising demand for AI platforms beyond hardware, although its revenue growth seems modest relative to its high valuation. In the second quarter, Palantir’s revenue increased by 27% year-over-year to $678 million, with U.S. commercial revenue growing by 55% and U.S. government revenue by 24%.
Palantir is also enhancing its adjusted profits and expanding its margins, suggesting the business might be undervalued based solely on its price-to-sales ratio. However, deciding to sell based on valuation alone is challenging, and predicting when valuation might pose an issue is uncertain, often triggered by weak quarterly results or unfavorable macroeconomic trends.
While Palantir is gaining momentum, selling its stock now might be misguided, considering its potential for growth. Nevertheless, existing shareholders should be aware that high expectations mean any signs of a slowdown for the company or AI spending, in general, could lead to a sell-off. Palantir has certainly been one of the significant surprises this year, with its third-quarter results expected to be reported on November 4 after market close.
