Palantir Technologies (NYSE:PLTR) is in the doldrums. After surging post-earnings in February, Palantir stock has been rangebound, trading just above and just below $25 per share during this time frame. Concerns about valuation and future growth are again top of mind. This has affected top AI stocks across the board, and PLTR is no exception.
If that doesn’t sound disheartening enough, this sentiment may linger in the immediate term. This is especially the case, following a recent development that is potentially further raising concerns about valuation and future growth. But while PLTR is stuck in the mud for now, don’t expect it to last for long.
Palantir Stock, an Analyst Downgrade, and Rising Valuation Concerns
Outside of announcements about the latest governmental contract wins, there has been little in the way of news out of Palantir Technologies. However, PLTR has been the subject of headlines, but not in a good way. We’re talking, of course, about a recent, widely reported analyst downgrade of this stock.
On March 28, analyst Brian White from Monness, Crespi, Hardt & Co downgraded Palantir stock from neutral to hold. In the downgrade, the sell-sider focused in particular on PLTR’s rich valuation on a price-to-sales basis.
Contrasting PLTR’s sales multiple of 18 against both the industry average of 6.3, and other pricey software stocks, White deemed its valuation “egregiously rich” and “excessive.”
With the analyst bearish on the direction of the economy, he believes that shares will fall back to earth on disappointment. White’s price target for Palantir is $20 per share, yet his sharp criticism may have valuation-conscious investors worried that a much larger drop is in store.
While it’s fact, not opinion, that Palantir is richly-priced, we believe that White’s take on this AI enterprise software company’s future prospects to be erroneous. Much still suggests that a growth resurgence will carry on in the quarters ahead.
Demolishing the Bear Case
First things first: the aforementioned bear case for Palantir stock assumes downbeat prospects for the economy from now on. The U.S. economy has, and remains poised to stay, resilient in light of challenges like high inflation.
Not only that, the rapid adoption of AI technology is a secular growth trend. This means high growth for the sector is likely to continue, irrespective of the overall economy’s direction.
As it pertains specifically to Palantir, not only is it benefiting from favorable industry demand trends. As we’ve pointed out previously, Palantir has been crushing it, with the rapid rollout of its Artificial Intelligence Platform.
Commercial revenue growth has accelerated. Based on commercial customer count, which is a leading indicator, this reacceleration stands to continue going forward.
With this, it’s very possible Palantir’s top line continues to grow in line, or even above, last quarter’s reported 20% revenue growth, for much longer than even some of this stock’s biggest fans anticipate.
Again, this may not translate into instantaneous outsized earnings growth, but as Palantir reaches scale, and the company reduces growth-related investments, its bottom line could skyrocket. Hence, why we are still of the view that loftier price levels lie ahead.
Patience is Key, but it May Prove Very Profitable
To reiterate, don’t assume that another rapid rally is just around the corner for PLTR. However, when we say that shares could stay in their current slump in the immediate term, we may be talking weeks, not months.
Palantir will release its next earnings report on May 8. These results, plus updates to guidance, could quickly shift investor perceptions, resulting in another strong post-earnings rally.
Even if this does not take shape, subsequent news/developments later this year could re-bolster confidence in the PLTR growth story.
With this in mind, don’t give in to the fear, uncertainty, and doubt being created by valuation-focused downgrades. Feel free to maintain an existing position, and if shares encounter any short-term volatility, consider seizing the opportunity.
Palantir stock earns a B rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in PLTR. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
