Tech firm Palantir Technologies (NASDAQ:PLTR) had a turbulent few years. On a year-to-date basis, PLTR stock has surged more than 130%. However, this stock remains more than 50% below its 2021 peak. Historical issues with overvaluation, low margins, and profitability seem to be improving with AI technology. However, this stock remains a no-go for many value-conscious and fundamentals-oriented investors.
Let’s dive into the bull case behind Palantir’s story and its potential catalysts, as well as why so many investors remain bearish on Palantir relative to other AI stocks in the market.
Why Wall Street Is Bearish for PLTR
Palantir Technologies serves private organizations and governments with data analysis solutions. In 2023, the company gained attention for its AI potential, with PLTR shares soaring more than 155% year-to-date at its peak, outpacing the S&P 500 by a wide margin. Despite a material dip from Palantir’s 52-week high, some analysts see underestimated AI capabilities as a potential driver for long-term growth.
However, Wall Street had divided opinions on Palantir’s short-term outlook. William Blair analyst Louie DiPalma believed that Palantir’s 2024 revenue estimate of $2.6 billion already factored in the £480 million, 7-year U.K. NHS Federated Data Platform contract. He sees downside potential due to increasing competition from mega-cap AI leaders, maintaining a “sell” rating without a target price.
I agree with the more bearish Wall Street analysts and their views, as I believe Palantir’s long-term track record speaks for itself.
PLTR is Overvalued
Established in 2023, Palantir specializes in big data analytics, serving the U.S. government. Going public in 2020 via a direct listing, PLTR stock initially surged but dropped due to high valuation and low margins. While the company’s valuation has since come down materially, PLTR stock continues to trade in the nosebleed levels of valuation, especially when one considers Palantir’s relatively modest growth and unimpressive margins.
Palantir’s revenue grew by just 13% to $533.3 million, yielding a net income of $28.1 million. Palantir’s profit margins were constrained by significant stock-based compensation, reaching $114.2 million in the same quarter. Although this approach conserves cash, it incurs actual costs through equity dilution, diminishing investors’ stakes in Palantir’s future earnings and cash flow.
Q3 Earnings Report on Nov. 2
In Q3, analysts anticipate revenue of $556.4 million, a 16.4% year-over-year increase, with the company bringing in earnings per share of only 2 cents. Palantir’s Q3 results will be due on November 3. Projections also foresee Palantir’s revenue rising from $1.9 billion in fiscal 2022 to $2.21 billion in fiscal 2023, aligning with management’s forecasts, indicating a 16.2% year-over-year growth. Further, revenue could grow by 19.0% to $2.64 billion in fiscal 2024.
However, Wall Street’s consensus on the stock is “hold.” Among 14 analysts, 2 rated it “strong buy,” 1 “moderate buy,” and 5 “hold.” There was 1 “moderate sell” and 5 “strong sell” recommendations. With an average price target of $13.81, analysts predicted a potential 16% downside over 12 months.
Now’s Not the Time to Get Greedy With This Name
Palantir stock currently provides investors a high forward price-earnings ratio of 61 times, well above the S&P 500’s median P/E ratio of 24 times. This valuation was notably high given its modest growth and stock-based compensation’s impact on shareholder dilution and earnings. However, AI technology and contracts with clients like the DoD could drive significant changes in the coming years.
The reality is that Palantir needs continued growth to justify its current share price and valuation. Investors expected growth from the company, and failure to deliver could deter new investments. That said, most rational investors (in my view) should at least consider monitoring these trends for a few more quarters before making any investment decisions on this stock, given its relatively short time frame of profitability.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.