Palantir Valuation is Way Too High, Raymond James Warns; Even Bulls Are Scared Now
1min read After a 150%+ rally this year, making it the third-best performer in the S&P 500 so far, Wall Street is sounding the alarm that Palantir's valuation is way too high now.
The data analytics company, known for offering tools to government agencies and corporations, saw its shares skyrocket this year. This surge was helped by its inclusion in the S&P 500 Index in September, AI's effort and partnership with Microsoft.
However, analysts don't expect the winning streak to continue. The average target implies a decline of more than 30% in the next 12 months — the most downside seen for any stock in the US benchmark, according to data compiled by Bloomberg.
It is noted that Palantir currently trades at more than 100 times future earnings, compared to Nvidia's 37 times and Oracle's 26 times.
Palantir shares need to consolidate stellar gains over the last couple of years and grow into its rich valuation, Raymond James analyst Brian Gesuale wrote, downgrading the stock. The rally means Palantir has no room for error when it reports earnings next month, Gesuale added.
Palantir will report Q3 results on November 4th. Analysts estimate third-quarter revenue of $702 million, up 26% from last year, with earnings growth of 28%.
I'm more concerned about their total clients, said Joe Tigay, portfolio manager at Equity Armor Investments, adding that growing the client list is more important for Palantir in the short term than the bottom line.
Jim Worden, CIO of Wealth Consulting Group, said that while the stock may be volatile into earnings, that doesn't have to be bad and could mean more upside. At the same time, Palantir's business with government agencies provides an anchor.
Palantir has this first mover advantage — the government contracts are sticky and there's a high cost to switch, said Worden, who also owns the stock. The company has won a range of recent government contracts, including for building out an AI platform for the military.
They'll have to show tangible incremental progress with their AI boot camps, said Hilary Frisch, director and senior research analyst at ClearBridge Investments, who also holds the stock. If they show incremental progress at the margins, that would be positive.
Frisch noted that recent gains for Palantir have probably been driven by retail investors, not institutional ones, while its recent addition to the S&P 500 may have caused some volatility. The inclusion means the company will be added to index-tracking funds held by major investors.
After the boost from being added to a major index, companies often have to spend some time growing into their valuation, Frisch said.
