AI Hype Boosts Palantir Stock; Analysts Warn of Overvaluation
Palantir (PLTR.US), which provides data analysis tools for businesses and governments, has seen its stock price soar nearly 150% this year, thanks to its inclusion in the S&P 500 index in September and its success in leveraging artificial intelligence.
However, Wall Street analysts do not believe that Palantir's strong momentum will continue. The average target price set by analysts for the stock implies a potential decline of over 30% in the next 12 months. Their caution is primarily due to Palantir's high valuation, with a forward price-to-earnings ratio of over 100 times, which is a significant premium compared to other AI companies. In contrast, the "AI behemoth" NVIDIA (NVDA.US) has a forward price-to-earnings ratio of about 37 times, and Oracle (ORCL.US), a software company that also benefits from AI-related advantages, has a forward price-to-earnings ratio of only 26 times.
Raymond James analysts, led by Brian Gesuale, stated in a recent report that Palantir's stock "needs to consolidate the substantial gains of the past few years." The analysts downgraded their rating for Palantir, adding that the stock price increase means there is "no room for error" when Palantir reports its earnings next month.
The general outlook among Wall Street analysts for Palantir is pessimistic. Out of the 21 analysts tracked by Bloomberg, only 4 recommend buying the stock, while 10 give a "hold" rating and 7 give a "sell" rating.
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Some Palantir investors also believe that the stock may experience volatility after a significant rise. Joe Tigay, portfolio manager at Equity Armor Investments LLC, said, "Palantir has risen too quickly, and with such a high valuation, it could fall due to bad news."
Palantir's second-quarter results for 2024, announced in early August, showed a 27% year-over-year increase in revenue to $678 million, which was better than the market's expected $652.8 million; net profit grew by 20% year-over-year to $134 million, significantly exceeding the market's expected $82.8 million; and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $262 million, a substantial 39% increase year-over-year. The second-quarter results demonstrated that, driven by the "Palantir AI Platform" built on its new generative AI technology, the company continues to expand its commercial and government business scale.
What excites investors even more is that Palantir raised its total revenue guidance for 2024 to between $2.74 billion and $2.75 billion, while analysts generally expected around $2.7 billion; the company also significantly raised its adjusted operating profit guidance for this year to between $966 million and $974 million, while analysts generally expected around $883 million.
Palantir will announce its third-quarter results for 2024 in November. Analysts currently expect the company's Q3 revenue to grow by 26% year-over-year to $702 million. In addition, investors will also pay attention to the latest developments in the company's new customers. Joe Tigay said, "I am more concerned about the total number of the company's customers." He added that, in the short term, increasing customers is more important for Palantir than making profits.
Palantir's launch of the Palantir AI Platform (AIP) in 2023 has garnered widespread attention and has been used on a large scale by over 100 organizations worldwide, including in healthcare and the automotive industry. This year, Palantir's AI tools have attracted new customers such as CBS, General Mills, and Aramark Services. The company also continues to win large contracts from the US and its allied government agencies, with government revenue accounting for the majority of the company's total revenue.
Jim Worden, Chief Investment Officer at Wealth Consulting Group, stated that although Palantir's stock price may fluctuate after the earnings announcement, this is not necessarily a bad thing and could mean that the stock has more room for upward movement. Jim Worden believes that Palantir's dealings with government agencies provide an "anchor." He said that Palantir has a "first-mover advantage, and government contracts are sticky, with high switching costs."Hilary Frisch, Director and Senior Research Analyst at ClearBridge Investments LLC, pointed out that Palantir needs to make tangible progress in attracting more customers. The analyst added that Palantir's recent rise may have been driven by retail investors rather than institutional investors, and the stock's recent inclusion in the S&P 500 index may have triggered some volatility. This implies that the company will be included in index-tracking funds held by major investors. The analyst stated that after being included in major indices, companies often need to take some time to grow to a level that matches their valuation.
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