Palantir Technologies (PLTR) has emerged as one of the top artificial intelligence (AI) stocks in the market. Established in 2003 in the aftermath of 9/11, the cloud software company specializes in data analytics, providing platforms that enable both governments and businesses to connect data points that would otherwise remain isolated. As Palantir gains traction among commercial clients, it continues to draw attention from investors, especially given its impressive stock performance.
With a staggering 140% increase in its stock price this year, Palantir has proven its profitability and rapidly expanding margins, significantly outperforming the S&P 500. As the company positions itself as a leader in the AI age, management anticipates a 47% growth in U.S. commercial revenue for the current year. However, despite this optimistic outlook, Wall Street analysts are beginning to express concerns about the stock’s high valuation.
Understanding Palantir’s Valuation
At present, Palantir is trading at a price-to-sales (P/S) ratio of 40, indicating that its valuation has increased significantly over the past year. This rise in the P/S ratio suggests that the stock’s gains have largely been driven by multiple expansions rather than organic business growth. While Palantir has turned a profit according to Generally Accepted Accounting Principles (GAAP), analysts are wary as the stock becomes increasingly pricey.
According to TipRanks, the average price target for Palantir is now $27.85, indicating a potential decline of 33% in the near term. Among analysts, there are four buy ratings, seven hold ratings, and six sell ratings, reflecting mixed sentiments. Notably, the highest price target from Bank of America stands at only $50, indicating skepticism about the stock’s near-term performance.
Should You Sell Palantir Stock?
Given the high P/S ratio, it’s reasonable to question whether Palantir is too expensive. Historical trends suggest that valuations at this level can lead to significant market corrections, reminiscent of the painful downturn experienced during the tech bubble of the pandemic.
Some investors believe that the current market may be overinflated due to excessive investments in AI hardware, as tech giants like Microsoft and Alphabet pour billions into data centers to dominate the AI race. Palantir’s growth reflects increasing demand not only for AI hardware but also for AI platforms, although its revenue growth has been slower than one might expect given its valuation. In the second quarter, the company reported 27% year-over-year revenue growth, with U.S. commercial revenue soaring by 55% while U.S. government revenue grew by 24%.
Despite the high valuation, Palantir is experiencing rapid growth in its adjusted profit margins, indicating that it could be cheaper than its P/S ratio suggests. The challenge remains in predicting when valuation will become an issue, as it often correlates with disappointing quarterly results or broader economic downturns.
The Future for Palantir
Selling stocks based on valuation alone can be a complex decision. While it may seem prudent given the current high P/S ratio, the company is making significant progress. With its upcoming third-quarter results set to be announced after market close on November 4, investors are keen to see if Palantir can maintain its momentum.
In conclusion, Palantir Technologies has been one of the year’s standout performers, with its impressive growth drawing both interest and scrutiny. Investors should keep a close eye on the company’s upcoming earnings and broader market trends as they evaluate the potential risks and rewards associated with holding or selling Palantir stock.
