The S&P500 (SNPINDEX: ^GSPC) is widely considered the best barometer for the overall U.S. stock market. The index tracks 500 domestic companies that meet specific inclusion requirements regarding market value, profitability and liquidity.
Last month, S&P Global has announced that Palantir Technologies (NYSE:PLTR) would be added to the S&P 500 on September 23. Wedbush Securities’ Dan Ives called it a “validation moment for the Palantir story.” Shares are up 22% since the announcement, but one analyst still sees big upside on the horizon.
Hilary Kramer, portfolio manager at Greentech Research, recently told Fox Business that Palantir could be a $100 stock in the future. While she didn’t discuss a specific timeline, her forecast implies a 170% upside from the current stock price of $37.
Here’s what investors need to know.
Palantir is the market leader in artificial intelligence platforms
With key platforms from Palantir, Foundry and Gotham, companies can capture data, develop machine learning (ML) models and integrate these assets into an ontology. The ontology defines the relationships between digital information and real-world counterparts. Users can interact with the ontology through analytical applications to improve decision making. Palantir says the ontology layer is a “key differentiator.”
In 2023, Palantir launched its Artificial Intelligence Platform (AIP), bringing support for large language models and generative AI to Foundry and Gotham. Experts have praised the product. In August, Forrester research recognized Palantir as a leader in AI/ML platforms, highlighting strengths in data ingestion and preparation, and intuitive user interfaces and automation. “Palantir is quietly becoming one of the biggest players in this market,” analysts wrote.
This bodes well for Palantir and its shareholders. The International Data Corp. (IDC) expects sales of AI platforms to increase 51% annually through 2028.
Palantir sees a relentless wave of demand for AIP
Palantir delivered strong performance in the second quarter, exceeding expectations on the top and bottom lines. Revenue rose 27% to $678 million and non-GAAP net income rose 80% to $0.09 per diluted share. CEO Alex Karp said: “The steady increase in our profits reflects the unbridled demand for and understanding of the capabilities of our software.” Management also raised full-year expectations, so revenue is now expected to grow 23% in 2024.
Karp also commented on AIP in his shareholder letter. “Our flagship artificial intelligence (AIP) was launched just over a year ago. And it has already transformed our business,” he wrote. “Our growth in the commercial and government markets has been driven by a relentless wave of customer demand for artificial intelligence systems that go beyond the merely performative and academic.”
Palantir has continued to make headlines since the end of the quarter. In September, it expanded its relationship with a longtime customer BP; the oil and gas company will use AIP to improve operational efficiency. Additionally, Bloomberg reported that the US government has awarded Palantir a $100 million contract that will make its AI targeting tools available to more military personnel.
Palantir stock is trading at a very expensive valuation
Palantir is an interesting company with a strong presence in a fast-growing sector, but its valuation is in the stratosphere. Wall Street expects Palantir’s adjusted profits to rise 22% annually through 2025. Meanwhile, the shares trade at 115 times adjusted earnings.
These numbers indicate a PEG ratio of greater than 5. For context, PEG ratios of 1 or 2 are generally considered reasonable. That means Palantir stock is outrageously expensive at its current price. Not surprisingly, Wall Street analysts are generally bearish on the company. The stock’s average price target of $27 per share implies a decline of 27% from the current share price of $37.
Barring an extreme acceleration in earnings growth, I doubt Palantir will get anywhere near $100 per share in the near future. And personally, I would avoid this stock until the valuation comes back to earth. There are plenty of other stocks that will benefit from the AI boom and are trading at more reasonable prices.
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Trevor Jennewine holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends BP, Palantir Technologies and S&P Global. The Motley Fool has a disclosure policy.
Meet the newest artificial intelligence (AI) stock in the S&P 500. Buy it before it soars 170%, according to a Wall Street analyst, originally published by The Motley Fool
