Palantir Technologies (NYSE:PLTR) has been one of the hottest stocks of 2024, with shares nearly doubling year-to-date on the wave of artificial-intelligence (AI) hype. The data analytics software provider is seen as a prime beneficiary of the AI revolution, especially given its deep ties to the U.S. government. However, as Palantir prepares to report Q2 earnings on August 5, I believe the stock’s sky-high valuation leaves significant room for disappointment. Even if results exceed expectations again, maintaining the current share price will require flawless execution and accelerating growth that may prove elusive.
Palantir’s Nosebleed Valuation Raises Red Flags
Despite pulling back over 5% last Friday, Palantir stock still trades at a whopping 75x forward earnings and 20x forward sales. Those are massive premiums to the overall software sector and the broader market. While bulls will argue Palantir deserves to trade at a premium given its government exposure and AI capabilities, the fact remains that its financial results have yet to justify such a lofty valuation.
In Q1, Palantir grew revenue by 21% to $634 million, beating estimates. However, that represented only a modest acceleration from 18% growth in Q4. The company also expanded adjusted operating margins to 36%. But again, that was only a slight improvement from 34% in the prior quarter. Hardly the explosive, transformational growth that Palantir’s current multiples imply.
Palantir did raise its full-year outlook, now expecting revenue of $2.68-$2.69 billion (up 21% at the midpoint). But even hitting the high end of that range would fall short of what’s baked into the stock. Analysts see Palantir growing sales by 21.3% this year to $2.7 billion. Meeting those expectations could prove challenging, especially as Palantir laps tougher comparisons in the second half and faces economic headwinds in Europe (16% of revenue).
Hype Cycle Leaves Palantir Vulnerable to a Pullback
I’ve been warning investors about Palantir’s excessive valuation for months now. The stock has continued defying gravity, but I fear the music will soon stop. We’re already seeing some cracks emerge. Monness Crespi analysts recently cautioned that Palantir’s valuation looks “absurd” and the “darkest days” for the economy still lie ahead. Earnings revisions have also plateaued after a strong run, suggesting the good news is more than priced in.
To be clear, I’m not arguing Palantir is a bad company. Its software is best-in-class, its government relationships are unparalleled, and it’s poised to be a major player in AI. Longer term, I believe the stock can continue to outperform. But in the near term, I worry that fundamentals will have difficulty catching up to the sentiment. Any hiccup in the business could cause a painful slide lower.
Steer Clear of Palantir Stock Ahead of Earnings
As much as I respect what Palantir is building, I simply can’t justify chasing PLTR stock at these levels. The risk/reward looks very poor heading into earnings. Even a substantial beat-and-raise may not be enough to propel shares much higher. But any disappointment could absolutely crater the stock, given how much optimism is already embedded in the price.
I’d suggest waiting for a better entry point for investors who are long-term believers in Palantir’s story. We’ve seen these AI hype cycles come and go before. Inevitably, the buzz fades, and valuations normalize. I suspect Palantir will be no different. Patience should be rewarded with a more attractive opportunity to build a position in the months ahead. But for now, the prudent move is to stay on the sidelines. PLTR stock is a “Sell” in my book.
On the date of publication, Omor Ibne Ehsan did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
