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Argus Downgrades Palantir: Valuation Concerns and Market Volatility

AInvestFriday, Nov 8, 2024 10:05 pm ET
2min read

Argus Research has downgraded Palantir Technologies Inc. (PLTR) to 'Hold' from 'Buy', citing concerns over the company's valuation and market volatility in high-growth tech. This move comes amidst a strong year for PLTR, with shares up 234% YTD, ranking second in the S&P 500. However, Argus analyst John Eade now believes that Palantir's valuation is unsustainable, trading at 38x 2025 revenue, more than double that of the No. 2 software name, CrowdStrike (CRWD).
Palantir's high valuation multiples have increased significantly due to strong stock performance. As of the downgrade, PLTR's forward EV/revenue multiple was around 15x, compared to the software industry average of 6x. Eade also noted that PLTR's stock price has been volatile, with a beta of 1.5, indicating higher risk than the broader market. Additionally, Argus highlighted the potential for earnings disappointments and slower growth in the future, which could lead to a re-rating of the stock.
Palantir's revenue growth rate has been impressive, but it lags behind some high-growth tech peers. In 2023, PLTR's revenue grew by 30%, while CrowdStrike (CRWD) and Datadog (DDOG) grew by 60% and 50% respectively. However, PLTR's growth is still higher than the average for the S&P 500. Despite the slower growth, PLTR's valuation remains high, with a price-to-sales ratio of 12, compared to CRWD's 10 and DDOG's 8.
Market volatility can significantly impact PLTR's stock price, given its high valuation and retail investor base. With half of PLTR's shares owned by retail investors, market sentiment and volatility can drive rapid price fluctuations. Retail investors, known for their emotional decision-making, may sell en masse during market drops, exacerbating PLTR's stock price decline. To mitigate this risk, investors should monitor market conditions and consider hedging strategies to protect their portfolios from excessive volatility.
Palantir's management team has acknowledged the concerns raised by Argus regarding the company's valuation and market volatility. In response, they have implemented several strategies to address these issues. First, the company has been focusing on improving operational efficiency and driving growth through its core software platforms, such as Gotham and Foundry. This focus on core competencies aims to enhance the company's fundamentals and validate its high valuation. Additionally, Palantir has been diversifying its customer base and expanding into new markets, reducing its reliance on a few large customers and mitigating market volatility. The management team has also been actively engaging with investors to communicate the company's long-term growth prospects and address any concerns about its valuation.
In conclusion, Argus's downgrade of Palantir Technologies Inc. (PLTR) to 'Hold' from 'Buy' highlights concerns over the company's valuation and market volatility in high-growth tech. While PLTR's strong fundamentals and innovative AI platform suggest long-term growth potential, investors should be mindful of the risks associated with its high valuation and retail-driven shareholder base. By focusing on core competencies, diversifying its customer base, and engaging with investors, Palantir's management team is taking steps to address these concerns and position the company for long-term success.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.