Palantir Outlook: 3 Reasons Why Investors Should Be Cautious on PLTR Stock

Stock Market

Palantir Technologies (NYSE:PLTR) initially focused on serving the defense and intelligence sectors but has since expanded its customer base to include various industries such as healthcare, energy, and finance.

The company has made impressive strides to improve profitability, and the new AI platform rolled out last year is accelerating top-line growth. As a result, there are many things to be excited about for PLTR’s long-term prospects, but investors should also be cautious.

AI Platform accelerates, reinvigorating growth

Last year, I wrote that demand for Palantir’s artificial intelligence solutions had picked up during Q3. This was according to the company’s third quarter earnings report.

While overall revenue for the third quarter increased 17% to $558 million, from $478 million a year earlier, the company’s “U.S. Commercial business segment”, increased revenue figures by 37% on a year-over-basis driven by demand for Palantir’s Artificial Intelligence Platform.

The data analytics firm’s AIP can deploy commercial and open-source large language models onto internally held data sets and, from there, recommend business processes and actions.

In their fourth quarter report, not only did financial figures come above Wall Street estimates, but CEO Alex Karp noted there was strong demand for AIP. This point clearly excited investors as Palantir’s shares popped 19% during the after-hours trading session.

As we’ll see in the following sections, despite AI tailwinds, the data analytics firm could still face a market rout.

Wall Street still has mixed views on PLTR’s prospects

Despite the AI craze pumping up Palantir’s shares, Wall Street seems less excited. According to Koyfin, there are 17 analysts covering PLTR and the stock has an overall “Hold” rating. The company only has 4 ratings that are categorized as “Buy” or “Strong Buy.”

The investment bank Jefferies most notably downgraded Palantir in early January due to “AI hype.” Jefferies research analysts noted that Palantir had benefitted so much from last year’s AI rally, yet the company had not produced the results to warrant such a rally in its share price. Palantir’s shares rose more than 167% in 2023.

Until we see more growth and customer traction from Palantir’s AIP, skepticism can only be healthy.

The data analytics firm’s valuation is becoming stretched

As mentioned previously, Palantir’s had a remarkable rally in 2023. The current year is looking like things could be similar. The data analytics company’s shares have risen 42.3% on a year-to-date basis. This all means Palantir’s valuation, despite the company experiencing growth in recent quarters, had to increase in tandem. Currently, PLTR is trading at 74.9x forward earnings.

Because a lot of PLTR’s valuation has been inflated by AI speculation, it’s hard to not compare to a stock like Nvidia (NASDAQ:NVDA), which has not only benefitted from the same AI craze but is a crucial component to the world of AI as we know it. Nvidia is trading at 35.4x forward earnings, well below that of Palantir’s. This should make investors pause and be cautious about where PLTR’s valuation is trading.

On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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