(Bloomberg) – Wall Street thinks Palantir Technologies (PLTR) is way ahead of itself after a nearly 150% rally that added about $60 billion to its market value.
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Shares of the company, which makes data analysis tools for businesses and governments, have soared this year after its inclusion in the S&P 500 index in September and its success in leveraging artificial intelligence. But analysts don’t expect the streak to continue, with the average price target suggesting a decline of more than 30% over the next 12 months, according to data compiled by Bloomberg. This is the lowest level among the benchmark stocks.
The main reason for their wariness is Palantir’s high reputation. The stock trades at more than 100 times forward earnings, a significant premium compared to other AI stocks, some of which are considered too expensive by investors. Nvidia trades at about 37 times forward earnings, while Oracle, a software company also riding on AI tailwinds, trades at just 26 times.
Raymond James analysts led by Brian Jeshuale said in a recent note that Palantir stock “should consolidate the significant gains of the past few years and grow to a rich valuation,” lowering the stock price. . The increase means there is “no margin for error” when Palantir releases its results next month, he added.
Palantir currently ranks third on the S&P 500 this year behind Vistra Inc. and Nvidia, but analysts are unusually negative about names exposed to AI. Of the 21 companies tracked by Bloomberg, only four have buy recommendations, 10 have hold ratings, and seven have sell ratings. Alex Karp, the company’s co-founder and CEO, has a love-hate relationship with Wall Street and said analysts don’t understand the company.
Still, the stock continues to rise thanks to the success of Palantir’s AI tools, which have attracted new customers this year including CBS Broadcasting, General Mills and Aramark Services. The company also continues to win large contracts with government agencies in the United States and allied countries, with government revenues accounting for the majority of overall sales.
Some Palantir investors agree that the stock price could be volatile after the big rally.
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“It’s happening too fast, and there will be bumps along the way,” said Joe Tiguey, portfolio manager at Equity Armor Investments. “With such a high valuation, there is potential for bad news,” he said, adding that Palantir potentially has more room to run.
The stock’s next test will come when Palantir reports earnings in November. Analysts expect third-quarter sales to rise 26% year-over-year to $702 million, with profit growth of 28%. Investors also want up-to-date information about new customers.
“I’m more concerned about their total number of customers,” Tiguey said, adding that growing the customer list is more important to Palantir in the short term than the bottom line.
Jim Warden, chief investment officer at Wealth Consulting Group, said that while stocks may fluctuate wildly on earnings, that’s not a bad thing and could mean more upside. At the same time, Palantir’s business with government agencies has become an anchor.
Palantir “has a first-mover advantage. It’s locked into government contracts and switching is expensive,” said Worden, who also owns the stock. The company has recently won various government contracts, including building an AI platform for the military.
Still, a big driver for further growth will be gaining more enterprise customers with its AI platform, which will be released in 2023. Palantir is trying to attract more customers by hosting test bootcamps that bring together its engineers and potential and current customers. Release that software.
“They will have to show measurable incremental progress in their AI bootcamps,” said Hilary Frisch, director and senior research analyst at ClearBridge Investments LLC, which also owns the stock. said. “If we see incremental progress on the margins, that will be a positive.”
Frisch said that while Palantir’s recent gains were likely driven by retail rather than institutional investors, recent additions to the S&P 500 may have caused some volatility. . This inclusion means that the company will be added to index-tracking funds held by major investors.
Frisch said companies often need to spend some time growing their valuations after gains from additions to major indexes.
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