Palantir Technologies Inc. shares have climbed to a record high, making it one of the top-performing stocks in the S&P 500 this year. The surge comes as investors anticipate strong third-quarter earnings, even as analysts express growing concerns over the data analysis company's exceptionally high valuation.
The company's stock is now priced at 85 times its expected sales for the next 12 months, the highest multiple of any company in the S&P 500 Index. This has created a sharp divide between bullish investors and cautious Wall Street analysts ahead of the crucial earnings announcement.
Key Takeaways
- Palantir's stock has gained 165% this year, making it the fifth-best performer in the S&P 500.
- The company's valuation is the most expensive in the S&P 500 based on a price-to-sales metric.
- Analysts expect third-quarter revenue to increase by 50% and adjusted earnings per share to jump nearly 70%.
- Despite strong growth projections, many analysts remain cautious, with twice as many assigning sell or hold ratings than buy ratings.
A Valuation That Defies Gravity
Investor enthusiasm has propelled Palantir's stock to unprecedented levels. The company's market performance has been remarkable, with a 165% gain this year placing it among the elite performers of the S&P 500.
However, this rally has pushed its valuation into territory that many financial experts find uncomfortable. At 85 times forward sales, Palantir stands alone as the most richly valued company in the index by that measure. Based on its price-to-earnings ratio, it ranks as the fourth most expensive.
By the Numbers
Palantir's valuation metrics highlight its premium status in the market. The stock is trading at 85 times expected 12-month sales, a figure that significantly outpaces its S&P 500 peers. This valuation is supported by a 165% stock price increase year-to-date.
This situation has become a major point of discussion on Wall Street. The core question is whether Palantir's future growth can justify such a high price tag today.
Wall Street Remains Divided
While investors continue to buy shares, many professional analysts are advising caution. The number of analysts with hold or sell ratings on the stock is double the number of those with buy ratings, indicating widespread skepticism.
“Valuation is our big stumbling block,” said Morgan Stanley analyst Sanjit Singh, who has the equivalent of a hold rating on the shares. “The most expensive I’ve seen in my career.”
This sentiment is shared by others who believe the stock's price is being driven more by market trends than by the company's fundamental financial health. Vikram Rai, a portfolio manager at First New York, noted that broader momentum in the market is lifting the stock, but he remains interested in the company's long-term prospects. “I would buy the next dip,” Rai stated, indicating he sold some shares for profit before the earnings release but would reinvest if the price falls.
Others see the high valuation as a significant risk. “When the music stops, this stock is going to get hit harder than others,” said Matt Maley, chief market strategist at Miller Tabak + Co. He acknowledged Palantir is one of the few companies profiting from its AI investments but suggested that “there are other AI plays which are cheaper, like Nvidia, that will be a little safer right now.”
The AI Factor and Business Growth
Much of the optimism surrounding Palantir is tied to its position in the booming artificial intelligence sector. The company's recent rally gained further momentum after Nvidia's CEO dismissed concerns about an AI bubble and announced Palantir as a new partner.
Palantir is actively expanding both its government and commercial businesses. The company recently secured a new contract with Poland, capitalizing on increased military spending. Its government segment currently accounts for 55% of its revenue.
Expanding Commercial Footprint
While known for its government contracts, Palantir is making significant inroads into the private sector. Its commercial business now represents 45% of total revenue. A recent agreement to provide AI software to telecom company Lumen Technologies Inc. underscores this strategic push to diversify its client base.
Some analysts believe this commercial growth is being underestimated. Tech bull Dan Ives wrote in a research note that Palantir “will grow into its valuation,” arguing that Wall Street is “still underestimating the company’s commercial efforts.”
Gil Luria, head of technology research at DA Davidson & Co., expects strength from the commercial side because Palantir can “get their customers to an AI solution faster and more effectively than anybody else.” Despite holding a neutral rating due to the stock’s high price, he doesn't “see a reason for the valuation to come down right now either.”
All Eyes on Upcoming Earnings
The upcoming third-quarter earnings report is seen as a critical test for Palantir. The market is anticipating impressive figures, with consensus estimates pointing to a 50% increase in revenue and a nearly 70% jump in adjusted earnings per share.
Meeting or exceeding these high expectations will be crucial for sustaining the stock's momentum. A strong report could validate the bullish investor thesis and force some skeptical analysts to reconsider their positions.
Conversely, any sign of slowing growth or failure to meet targets could provide ammunition for the bears and potentially trigger a sharp correction in the stock price. For now, the market waits to see if Palantir's performance can justify its stratospheric valuation.
