Palantir Technologies Inc. is leaving Wall Street skeptics scratching their heads as its stock continues to soar despite mounting concerns over its steep valuation and questions about the sustainability of its growth.
Shares in the artificial intelligence (AI) software maker have surged more than 250% this year, with a significant portion of the gains coming after last week’s better-than-expected earnings report. The stock has also been buoyed by the outcome of Donald Trump’s election victory, with analysts speculating that the company’s strong ties to the former president and the potential for a government-backed AI push could provide additional revenue growth.
As of this week, Palantir’s stock has jumped 47%, bringing its already high valuation to even greater heights. The company’s shares now trade at around 135 times forward earnings, a stark contrast to the Nasdaq 100 Index’s average ratio of about 27 times. This makes Palantir the most expensive stock in the S&P 500 on an enterprise value-to-revenue basis. For some analysts, these gains have raised alarms.
Brent Thill, a Jefferies analyst, downgraded Palantir to “underperform,” warning that the company would need to accelerate its sales growth to 40% annually for the next four years to justify its stock price. He argued that this level of sustained growth seemed unlikely, especially given consensus estimates for the company’s growth of around 26% this year and 24% next year. Thill pointed to Palantir’s unsustainable valuation as a key risk.
Joseph Bonner from Argus Research shared a similar view, noting that Palantir’s rapid rise may be getting ahead of the company’s fundamentals. Bonner also cautioned that Palantir’s niche focus on serving organizations with highly complex IT challenges could lead to unpredictable results, which may not align with the expectations baked into the stock’s lofty price.
Wall Street’s view on Palantir is mixed. Of the 20 analysts covering the stock, half have rated it a “hold” or equivalent, while only three have a “buy” rating, and seven have recommended selling. The average target price for the stock suggests a 39% downside, a significant gap from its current trading levels. Retail investors have been key supporters of Palantir, contributing to its volatility and fueling concerns over the company’s long-term prospects.
However, despite these doubts, Palantir’s stock continues to attract bullish momentum. Much of this has been driven by investor optimism surrounding the potential for government contracts under a new administration. Palantir derives more than half of its revenue from government business, and analysts like Gil Luria from DA Davidson believe that the company’s close ties to Trump’s administration—through CEO Alex Karp, co-founder Joe Lonsdale, and chairman Peter Thiel—could lead to more opportunities.
Luria suggested that Palantir’s ideology and vision align with that of Trump’s administration, particularly regarding a focus on selling to Western countries and a commitment to supporting patriotic US businesses. Wedbush Securities analyst Dan Ives also echoed this sentiment, pointing to a potential AI push by the government, particularly within the Department of Defense, as a major tailwind for the company’s future growth.
Despite these positive predictions, even Palantir’s most optimistic supporters are grappling with the stock’s meteoric rise. Ives, a long-time bull on Palantir, has a price target of $57 for the stock, but the company’s shares have already surpassed that level, highlighting the rapid pace at which the stock has rallied.
With input from Bloomberg and the Motley Fool.
