What’s the best example of a stock benefiting from the recent election results? Palantir Technologies (NASDAQ: PLTR) should rank near the top of the list. Shares of the artificial intelligence (AI) and data analytics software company have nearly quadrupled in value year to date. Much of this gain (although certainly not all of it) has come since the election on Nov. 5, 2024.
However, this tremendous performance could soon come to a screeching halt. Some on Wall Street predict that Palantir stock is headed down instead of up.
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The average analysts’ 12-month price target for Palantir is $39.57, based on data compiled by financial markets infrastructure and data provider LSEG. That’s more than 40% below Palantir’s current share price.
Sure, one analyst is especially downbeat about Palantir with a 12-month price target of $11. This ultra-bearish target pulls down the average to some extent. However, one outlier isn’t enough by itself to make the average price target for the stock so bearish.
The reality is that there is a negative sentiment about this high-flying stock among many on Wall Street. Seven of the 19 analysts surveyed by LSEG in December rate Palantir as an “underperform” or a “sell.” Another eight analysts recommend holding the stock. Only four rate Palantir as a “buy” or a “strong buy.”
In November, two analysts downgraded Palantir stock. The last upgrades for Palantir reported by LSEG came all the way back in February 2024.
Analysts don’t have good reasons to be pessimistic about Palantir’s business. The company’s total revenue soared 30% year over year in the third quarter of 2024 and rose 7% sequentially. Its GAAP earnings per share (EPS) doubled year over year, while adjusted EPS jumped 43%.
During Q3, Palantir closed 104 deals valued at over $1 million. Thirty-six of those deals were for at least $5 million. One especially important contract for the company was a five-year deal of up to $100 million to expand Maven Smart System AI/machine learning capabilities for the U.S. military.
While Palantir is best known for its government business (the U.S. government is its largest customer), the company also has thriving commercial operations. In Q3, Palantir’s number of commercial customers jumped 51% year over year, with the number of U.S. commercial customers soaring 77%.
So why do some analysts think Palantir’s share price will fall? The price is higher than the company’s admittedly strong business prospects warrant. According to reports, Jefferies‘ downgrade of the stock last month was primarily due to concerns about an unsupportable valuation.
Palantir’s shares currently trade at nearly 145 times forward earnings. Could the company’s growth justify such a sky-high premium? Not according to the consensus of analysts surveyed by LSEG. The stock’s price-to-earnings-to-growth (PEG) ratio based on five-year earnings growth projections is 3.0, which is also a high multiple.
I don’t know if Palantir’s share price will fall 40% over the next 12 months. It wouldn’t surprise me if the stock continued to climb over the near term. But are Wall Street’s concerns about Palantir’s valuation reasonable? I think so.
Granted, Palantir will almost certainly deliver impressive revenue and earnings growth over the next few years. The company’s technology is likely to enjoy strong demand, especially if there’s a focus in the next presidential administration on improving efficiency across government agencies and aggressively beefing up immigration enforcement. I fully expect Palantir’s commercial business to prosper as well.
However, I’m squeamish about predicting that Palantir will deliver growth at the levels needed to justify a forward earnings multiple right now of 145. This stock is priced for perfection — and companies rarely execute perfectly.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Palantir Stock Could Plunge 40% Over the Next 12 Months, According to Wall Street. Are Analysts Right About This AI Stock? was originally published by The Motley Fool
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