The share price of American software giant Palantir Technologies (NASDAQ: PLTR) is trading at a new all-time high, but the trajectory has raised concerns regarding the equity’s actual valuation.
This concern comes after PLTR hit a new record price of $40 for the first time, following an exemplary year of gains due to the company’s venture into the artificial intelligence (AI) space.
At the close of the latest trading session, Palantir was trading at $40.01, ending the day up almost 2%, while over the past month, the equity has surged more than 31%. With the stock hitting $40, investors are bullish on the equity and hope $50 will be the next target, possibly by the end of 2024.
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Concerns about PLTR stock valuation
Now, stock analyst Jake Ruth issued a cautionary note about Palantir’s valuation, calling it “very expensive” at $40 a share. According to Ruth, considerable optimism is baked into the stock price, and investors should be wary, as he stated in an X post on October 4.
Ruth emphasized the importance of focusing on fundamentals, noting that market optimism may not fully reflect Palantir’s future challenges. He warned that if the company fails to meet its ambitious growth targets, its stock price could sharply decline.
“PLTR is looking VERY expensive at $40 a share.<…> Valuations matter. Maybe this is a fair price and they will keep killing it, just be careful out there. Multiple expansion can’t continue forever,” he warned.
Palantir’s current valuation assumes very optimistic growth, with Ruth projecting a 10% annual growth and a 30% compound increase in operating cash flow over the next five years, potentially reaching $2.6 billion by 2029. However, he cautioned that these expectations are high, and the company’s Price-to-Operating Cash Flow ratio of 55 suggests an unsustainable premium.
Amid concerns about Palantir’s valuation, another analyst with the pseudonym Lin stated in an X post on October 4 that PLTR has solidified its position as a “monster stock,” currently in a precise Stage 2 uptrend, according to stage analysis—a method used to identify broader trends in stock performance.
His analysis indicated that Palantir has already completed an entire cycle, progressing through the traditional four stages of the market cycle: accumulation (Stage 1), uptrend (Stage 2), distribution (Stage 3), and decline (Stage 4). Palantir’s stock is on a strong upward trajectory (Stage 2).
However, while the current trend is solid, there is no low-risk entry point. The key will be monitoring the stock for any signs of breaking into Stage 4, indicating a potential decline.
PLTR stock key fundamentals
It’s worth noting that part of Palantir’s recent momentum has been tied to continued bullish sentiments, such as the company’s addition to the S&P 500 index alongside key partnership deals.
For instance, the technology giant signed an agreement with Edgescale AI to launch Live Edge, a platform that merges Palantir’s Edge AI with Edgescale AI’s infrastructure technology. The two entities aim to help use AI in manufacturing and utilities through the partnership. Additionally, Palantir was awarded a $99.8 million military AI contract from the DEVCOM Army Research Laboratory.
Indeed, these contracts will likely fuel the growth needed to drive investor confidence, especially considering that Palantir continues to face questions regarding its valuation. The issue of Palantir’s valuation has also reached Wall Street, with some analysts turning bearish on the company due to uncertainty about its future outlook.
To this end, investors will be hoping for growth in the company’s revenues under both the commercial and government segments. As a recap, Palantir’s commercial segment recorded 33% year-over-year revenue growth in the second quarter, reaching $307 million. On the other hand, the government segment grew 23% year-over-year in Q2 to reach $371 million in revenue.
In light of these developments, some analysts have offered revised targets for PLTR. For instance, Daniel Ives from Wedbush raised his target from $38 to $45, maintaining an “Outperform” rating. Similarly, Mariana Perez of Bank of America (NYSE: BAC) significantly increased her target from $30 to $50, upgrading her recommendation to a “Buy” rating.
In conclusion, while Palantir Technologies has experienced impressive stock growth, concerns about its valuation persist. As the stock continues to navigate both bullish optimism and skepticism, its future performance will depend on how well it sustains growth.
