Palantir Technologies(NASDAQ:PLTR) has been one of the hottest stocks on the market in recent months. Shares are up 320% since December 5 on the back of enthusiasm around artificial intelligence (AI). That makes Palantir the best performing member of the S&P500(SNPINDEX: ^GSPC) this year.
The company is currently worth $165 billion, but Wedbush Securities’ Dan Ives thinks “Palantir could be next.” OracleThis statement might have caught the attention of more investors had Ives (for lack of a better word) chosen a more trendy comparison, but the implications are still huge for shareholders.
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Oracle is a $500 billion company (200% more than Palantir), with a strong presence in several enterprise software verticals, including analytics and business intelligence platforms. Ives doesn’t expect Palantir’s shares to rise 200% in the next 12 months, but instead thinks the company can grow to that valuation over the next three to four years.
What makes this call particularly surprising is that most experts are still skeptical about Palantir. Among the 20 analysts covering the company, the stock has an average price target of $38 per share. That implies a 47% downside from the current share price of $72.
Here’s what investors need to know about Palantir.
Palantir helps commercial and government organizations gain insight into complex data. The core Gotham and Foundry products enable customers to integrate intelligence and machine learning (ML) models into analytics applications. And its AI platform AIP adds support for large language models and generative AI to its core software products.
In August, Forrester research recognized the company as a leader in AI/ML platforms. The analysts wrote: “Palantir is quietly becoming one of the biggest players in this market.” And in September, Dresner Advisory Services listed Palantir as a top vendor in its 2024 market study on AI/ML and data science software.
That puts the company in a good position. The International Data Corp. (IDC) estimates that spending on AI platforms will increase 41% annually through 2028. Meanwhile, Grand View Research expects the data analytics software market to grow 27% annually through 2030.
Palantir has met all requirements with its third quarter financial report. The company exceeded expectations, raising full-year expectations and providing encouraging insight into the business. Total revenue rose 30% to $725 million, the fifth consecutive acceleration, and non-GAAP net income rose 43% to $0.10 per diluted share.
Of particular note was 40% revenue growth among US government customers, an acceleration from 24% in the second quarter and 12% in the first quarter. CFO Dave Glazer attributed the increase to new contract awards reflecting growing demand for AI in government software. Palantir, for example, recently won a $100 million deal that will expand its Maven Smart System for battlespace awareness to more U.S. military personnel.
Looking ahead, management now expects full-year revenue to increase 26%, which is 3 percentage points faster than what the company previously expected. However, that forecast implies that sales will grow 26% in the fourth quarter, which would be a slowdown from the 30% in the third quarter.
Image source: Getty Images.
Palantir should benefit as commercial and government sector organizations use AI analytics to improve workforce productivity and operational efficiency. But the valuation is quite worrying. Wall Street expects adjusted earnings to rise 25% annually through 2027, making the current price-to-earnings (P/E) ratio of 205 seem absurdly expensive.
Wedbush analyst Dan Ives thinks Wall Street is underestimating how much Palantir will benefit as demand for AI software increases. He estimates that profits could grow 15% to 20% faster than analysts expect. But even in that scenario, the current valuation still seems unreasonable. DA Davidson’s Gil Luria recently said that Palantir is trading at “an unprecedented premium” to other software companies.
Ives doesn’t seem concerned about the valuation, but he also sees little upside potential in the near term. Despite Palantir arguably being the next Oracle, and once referring to the stock as “probably the best pure play AI name,” Ives’ 12-month price target of $75 per share implies only 4% upside from the current share price of $72.
Personally, I think investors should avoid this stock right now. Palantir is performing well on what promises to be a huge market opportunity, but its current valuation appears disconnected from its business fundamentals. My opinion may lead to short-term regret if Palantir stock continues to rise, but I think investors will have the opportunity to buy at a much lower price in the future.
Consider the following before purchasing shares in Palantir Technologies:
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Trevor Jennewine holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Oracle and Palantir Technologies. The Motley Fool has a disclosure policy.
Buy Palantir Stock Before It Soars 200% to $500 Billion, According to a Wall Street Analyst, originally published by The Motley Fool
