Buying high-valuation stocks is a gamble: betting big on growth but risking a sharp decline if sentiment fades and expectations don't pan out.
Palantir Technologies (PLT) shows this possibility. As a market favorite in artificial intelligence and data analytics, the stock has quadrupled so far this year.
Its very high valuation makes investors wonder if the price is fair or a bubble.
Palantir provides big data analytics. According to investment firm GraniteShares, Palantir's products allow its clients to “detect patterns and discover hidden connections in large data sets.”
The US government is Palantir's largest customer. It also serves business clients such as two European giants, Airbus in aircraft production and healthcare company Merck KGaA.
Palantir said on Dec. 18 that it had extended a $400.7 million contract with the U.S. military for up to four years, with a cap of $618.9 million.
The company and the Army have partnered since 2018 in a program known as Army Vantage.
“The Army has leveraged Palantir software to transform how it uses data and artificial intelligence to more effectively perform critical missions and enable faster decision-making across the force,” Palantir said in a statement.
Palantir surged nearly 4% following the news. The stock will join the Nasdaq 100 index on December 23.
Strong demand boosts Palantir's profits and shares
Palantir's rise is driven by the company's growing role in ai and increased demand for the technology and its applications.
In November, the company released quarterly results and guidance well above Wall Street expectations.
Palantir earned 10 cents a share in the third quarter, beating the 9 cents Wall Street expected. Revenue of $726 million beat the consensus estimate of $701 million.
Related: Analysts revise Palantir stock price target after Q3 earnings
CEO Alex Karp attributed the performance to growing demand for artificial intelligence.
“We absolutely gutted this quarter, driven by relentless demand for ai that will not slow down,” Karp said in the earnings release.
“Our business growth is accelerating and financial performance is exceeding expectations,” he added.
Looking ahead, Palantir projected fourth-quarter revenue of $767 million to $771 million, above analysts' forecast of $741.4 million.
For the full year 2024, the company raised its revenue guidance to a range of $2.805 billion to $2.809 billion, a growth rate of 26%.
Despite all this, insiders have been selling Palantir shares for the past two months.
Chasing Palantir's rise could be risky, analysts warn
UBS initiated coverage of Palantir with a neutral rating and a price target of $80, thefly.com reported on December 19.
The investment firm has a positive view of Palantir's fundamentals. Its analyst said Palantir is well positioned for ai-driven growth and described it as a “key winner in ai data.”
UBS estimates Palantir's revenue growth will be 28% in 2025 and 25% in 2026, above the Wall Street consensus.
But the company is concerned about the stock valuation.
Related: Here's What a Veteran Trader Who Predicted Palantir Stock's Rally Is Saying Now
“The main thing keeping us on the sidelines is the valuation, which, at 49 times (revenue) and 124 times (free cash flow) based on 2025 estimates, was simply hard to beat,” the company wrote.
Multiples of that size could indicate that the stock is overvalued compared to its peers, and the price may not be sustainable if the company fails to meet growth expectations.
More than a week ago, Baird also initiated coverage of Palantir with a neutral rating. The target price: $70.
The investment firm says Palantir has excelled in producing generative ai applications, but the growth potential is offset by the stock's valuation.
More ai actions:
- Top Analyst Revises Micron Stock Price Target Ahead of Q1 Earnings
- Analysts renew Ciena stock price target after ai outlook
- Cathie Wood Buys $30 Million in Under-the-radar ai stocks
Baird is “cautious about chasing” the stock given the strong performance and valuation so far this year.
Of the 16 analysts surveyed by TheStreet, 2 rate Palantir a Strong Buy, 7 suggest Hold, 2 recommend a Moderate Sell, and 5 recommend a Strong Sell.
Palantir shares closed at $74.21 on December 20.
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