Palantir Stock Gets a Downgrade – Is the AI Superstar Overvalued?

• AI and software giant Palantir has enjoyed a recent uplift in its stock price, defying analyst calls
• The firm has also far outperformed the S&P 500 in the past year, gaining more than 120%
• But there are questions over whether this market optimism is justified

Share prices have more than doubled over the past year

Software specialist Palantir Technologies (NYSE:) stock finished firmly in the green on Monday, defying fresh analyst downgrades and suggesting the market remains bullish about the firm’s growth prospects.

Led by Brian Gesuale, Raymond James analysts downgraded PLTR stock from ‘Outperform’ to ‘Market Perform’, withdrawing its $30 price target on the shares. Nevertheless, Palantir Technologies stock closed up 1.95% on Monday, landing at $37.92.

While the analysts remain optimistic about Palantir Technologies’ long-term positioning in the AI technology market, they’re concerned about the sharp rise of the stock. In fact, the stock has gained slightly more than 120% year to date, while the has risen around 20%.

The analysts also expressed concerns about Palantir’s elevated valuation, noting that the firm’s shares have more than doubled in value over the past year.

However, Palantir Technologies is a revenue and net income grower about to join a major stock market index. There are questions, then, about whether the market has already priced in the past, present, and future good news for Palantir.

Evidently, steep share-price rallies can lead to elevated valuations. In the case of Palantir Technologies, the Raymond James analysts observed that the company trades at 26.1x fiscal 2025 sales estimates, which is much higher than the historical average of 14.9x.

Moreover, Palantir’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is 219.55x, versus the sector median P/E ratio of 29.18x. This arguably justifies the analysts’ scepticism of the firm.

There’s No Denying Palantir’s Income Growth

Still, the market overlooked Gesuale’s downgrade, perhaps because investors are optimistic about Palantir Technologies’ bottom-line financials. For the three months ended June 30, 2024, Palantir reported $135.57 million of net income, versus $27.872 million in the year-earlier quarter.

That’s a 386% net income change in just one year, and it certainly bolsters the bull case for PLTR stock. Yet, it still may be difficult for contrarians and value investors to justify Palantir Technologies’ 219.55x P/E ratio.

Besides, Gesuale’s re-rating to Market Perform still implies a positive overall rating for Palantir Technologies. Also, it makes perfect sense for Gesuale to withdraw his $30 price target on PLTR stock since the share price is much higher than that now.

Palantir’s S&P 500 Inclusion Already Priced In

Adding to the bullish side of the debate is the fact that Palantir Technologies has just been added to the S&P 500 index. That’s a major win for Palantir and its shareholders since it means that legions of S&P 500 index fund holders will indirectly invest in Palantir Technologies.

On the other hand, the financial markets are highly efficient. Stock traders didn’t hesitate to price this positive news about Palantir Technologies immediately.

The Raymond James analysts noted that, after the disclosure of Palantir joining the S&P 500, PLTR stock zoomed 23% higher in just a couple of weeks. This, according to the Raymond James analysts, leaves “significant positive estimate revisions as the lone catalyst from here” for Palantir stock.

That’s a fair point, and despite Palantir Technologies’ impressive net income growth, it appears that the market already priced in a lot of optimism. Consequently, even after news of Palantir’s S&P 500 inclusion, it’s probably wise to let Palantir Technologies stock go down or sideways for a while before picking up some shares.

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