Contemplating an Investment in Palantir Shares following a 370% Surge in 2024? Wall Street Offers a Steadfast Response for Shareholders
Shares of Palantir Technologies (PLTR) have climbed a staggering 370% this year. Key factors driving this surge include notable financial results driven by the demand for its AI platform, along with its inclusion in both the S&P 500 and Nasdaq-100. Yet, potential investors should exercise caution before jumping in. ManyWall Street analysts view Palantir as among the most overvalued stocks on the market.
According to The Wall Street Journal, the median 12-month target among the 22 analysts tracking Palantir is a modest $41 per share. This implies a substantial 49% potential decrease from the current $80.50 share price. It's important to note that median implies half of the analysts project a larger decline. Even the most optimistic 12-month target of $80 per share indicates downside potential.
However, some analysts, such as Dan Ives from Wedbush, believe that most critics underestimate Palantir. He sees palantir as having the potential to become the next Oracle. This comparison likens the company to a $500 billion software giant. Ives believes Palantir could achieve this valuation over the next three to four years. While some analysts remain bearish, even Ives acknowledges the potential for downside in the short term.
Here are the advantages and disadvantages of investing in Palantir:
Palantir leads the way in AI software
Palantir sells data analytics software. Its Gotham and Foundry platforms allow clients to integrate information and machine learning models into an ontology, a digital map that depicts relationships between real-world objects. Ontology data can be queried with analytical tools to improve decision-making. For example, a manufacturing company can consolidate and analyze data from machine sensors and inventory systems to track production and identify issues.
Last year, Palantir introduced its AI platform, AIP, which adds large language model support to Gotham and Foundry. AIP enables businesses to apply generative AI to their operations. For example, a manufacturing company could use the platform to trace quality issues to specific raw materials and machines by querying in natural language.
Palantir claims that its ontology-centric architecture sets its platforms apart from other analytics software. AIP has been an undeniable success, according to Forrester Research, which ranked the company as a leader in AI and machine learning software earlier this year. Forrester awarded AIP higher scores than similar products from Microsoft and Alphabet.
This bodes well for the company and its investors, as AI platform spending is projected to grow at a 51% annual rate through 2028. According to Andrea Minonne at the International Data Corp., "AI platforms will be the fastest-growing technology in the next few years." This should provide a strong tailwind for Palantir's business in the coming years.
Palantir's revenue growth is surging
Palantir delivered impressive financial results in the third quarter, with a 39% increase in customers to 629 and a 18% increase in spending per existing customer. Revenue soared 30% to $726 million, marking the fifth consecutive quarter of acceleration. Non-GAAP earnings also increased 42% to $0.10 per diluted share.
Management attributed the positive performance to the strong demand for AIP. "We utterly crushed this quarter, driven by incessant demand for AI that won't wane," CEO Alex Karp said in his characteristic colourful language. "The world will be divided between the AI haves and have-nots. At Palantir, we plan to empower the winners."
Palantir made several notable announcements since the quarter ended, including winning a $37 million contract with the U.S. Special Operations Command and obtaining FedRAMP High Authorization, allowing its entire product portfolio to be used for sensitive unclassified workloads by the U.S. government. This could potentially lead to more government contracts in the future.
Palantir's valuation is overly expensive
Despite its strong performance, Palantir has an issue with valuation that investors cannot ignore. The stock trades at an outrageous 230 times adjusted earnings, a huge premium compared to virtually every software company. This valuation is particularly ludicrous considering Palantir's earnings are projected to increase by 31% over the next 12 months. This translates to a PEG ratio of 7.4.
For comparison, using the same methodology, Nvidia has a PEG ratio of 1, Meta Platforms has a PEG ratio of 1.8, and Amazon has a PEG ratio of 1.9. Even Tesla, with its notoriously high PEG ratio of 6, appears to be a better value compared to Palantir's lofty valuation. So far, Palantir's shares have only gone up, but even the best stocks aren't worth buying at any cost. Investors purchasing shares of Palantir today would be taking on unnecessary risk.
Despite the impressive revenue growth and strong demand for Palantir's AI platform, some financial analysts advise caution when investing in the company due to its overvalued share price. The high valuation, with a PE ratio of 230 times adjusted earnings, is significantly higher than its peers in the software industry. Therefore, potential investors should carefully consider their risk tolerance and conduct thorough research before investing money in Palantir Technologies.
To effectively manage their investments, investors might consider diversifying their portfolio, allocating funds to a mix of undervalued and overvalued stocks, and hedging their risks with financial instruments such as options or futures contracts. These strategies can help minimize potential losses and maximize returns in various market conditions.
