Is Palantir on the Precipice of a Sharp Fall?

Palantir (NYSE:PLTR) has been among the biggest beneficiaries of this year’s AI bull run and the more recent post-election rally. The stock started this year at just $16.58 and has since skyrocketed to over $60 per share.

The last month has been particularly dramatic when PLTR started November a little over $40 before being pushed skyward following election news that was deemed positive and a stellar Q3 earnings report.

The real question now is whether this year’s gains have taken the stock so high that it’s overvalued.

Key Points

• Palantir’s Q3 revenue rose 30%, driven by a 54% increase in US commercial sales, with sustained growth expected from private sector adoption and AI demand.
• Trading at 163x earnings and 650x cash flow, Palantir’s stock appears significantly overvalued.
• Insiders sold nearly $2 billion in shares this year, signaling concerns about the stock’s high valuation.

Just How Good Was the Q3 Earnings Report?

Since the Q3 earnings release was one of the major drivers of Palantir’s sudden surge, it’s a good place to start in figuring out if the stock is overvalued.

By almost every measure, Q3 was an excellent one for the company. Total revenue rose 30%, reaching $499 million.

Beneath this number are even more positive results for Palantir’s long-term growth strategy. US commercial revenue, an area where Palantir has been making inroads recently, grew 54% from the year-ago quarter.

The $179 million contributed by US commercial customers is very good news for the company’s efforts to take advantage of the private sector in addition to its portfolio of government contracts.

Palantir was also able to acquire 104 new contracts with values exceeding $1 million last quarter, a result that came alongside a 39% rise in the company’s total number of customers. Earnings, meanwhile, rose 100% from the year-prior quarter to $0.06 per share.

These results paint an extremely positive picture that the market has been largely right to respond well to. Revenues are continuing to rise, driven by the crucially important increase in private sector commercial sales.

At the same time, Palantir’s earnings are still growing quickly, providing buoyancy to the stock’s price and long-term value. Though the rise in prices has certainly been sharp, it’s not hard to see why investors were so quick to scoop up shares of PLTR coming off of the Q3 report.

How Much More Runway Does Palantir Have?

Of course, the surging price of PLTR shares is also driven by investor expectations that the company still has significant headroom left for additional growth.

Alongside Q3’s reporting, management raised its full-year revenue guidance to about $2.81 billion. Q4 revenues are expected to account for $767-771 million of this total.

It’s also likely that Palantir’s growth will remain very high for several years to come. Analysts project a roughly 26% annualized increase in earnings per share over the next 3-5 years.

Though there are no guarantees, it’s not even all that difficult to imagine the company outperforming this expected range if it keeps acquiring large, new commercial customers.

In addition to its own solid execution, Palantir is also apt to benefit from secular tailwinds in AI demand. The company has spent most of its lifetime at the cutting edge of data analytics and machine learning, a skill set that has translated easily into the burgeoning generative AI world.

Though Palantir will face its fair share of competition from other AI startups, it has a leg up on most potential competitors that will likely give it something of a moat.

Analysts Are Still Bearish on PLTR

Unsurprisingly, the Q3 report led many analysts to upgrade their price forecasts for Palantir. Even with these increased targets baked in, though, there may still be an unhealthy amount of downside in Palantir shares. This is because the market’s enthusiasm has sent the stock far higher than even what the most optimistic analysts believe is its fair value.

The average price target for Palantir is currently $31.71 per share, just under half the most recent closing price of $62.11 per share.

Of particular note is the fact that the highest analyst price target for Palantir in the coming 12 months is $50 per share, meaning that the stock could have a downside of about 20% under even a best-case scenario.

Reflecting the view that the stock’s price has simply gotten too high, only two of the 16 analysts covering PLTR currently have standing buy ratings on it.

A Closer Look at Palantir’s Price Metrics

When looking at PLTR’s pricing multiples, it becomes easier to see why analyst price targets run far below the actual price the stock is trading for.

Palantir shares currently trade at around 53x sales and 163x forward earnings. As though these numbers aren’t worrisome enough, the stock is also priced at an astronomical 650x cash flow.

Even with excellent performance behind it and a great growth runway in front of it, these multiples provide strong evidence for overvaluation. Even if Palantir continues to turn in remarkably high levels of earnings growth, it could fail to justify its current pricing.

Anything less than stellar performance could cause the market to pull back and saddle investors who buy at these prices with significant losses.

Is Palantir Stock Overvalued?

In the end, Palantir’s sky high forward earnings multiple of 163x at the moment makes it seem quite likely that the stock is overvalued.

While some premium is certainly justified for Palantir’s excellent performance and potential for growth, the multiples the stock trades at right now may prove to be unsustainable.

Today’s pricing also leaves no room for any kind of slowdown, meaning that Palantir shares could be quite vulnerable to negative macroeconomic factors.

An additional piece of evidence for this view may be found in this year’s history of insider transactions. Insiders have sold nearly $2 billion worth of PLTR shares in the last 12 months.

Crucially, the pace of insider selling has increased dramatically in each successive quarter of the year. In other words, insiders have become progressively more likely to sell their shares as the stock’s price has ramped up.

There’s no doubt that PLTR shares have delivered exceptional returns to those who invested early. For this reason, those with a low cost basis in the stock may still do well to hold and allow continued growth to work for them. For newcomers to PLTR, though, it appears that prices at the moment may simply be too high.