3 Reasons Investors Should Stay on the Sidelines With Palantir Stock

Palantir (NYSE:PLTR) investors are pretty happy these days. The Peter Thiel-founded data analytics firm has seen its share price rally nearly 68% since the start of the current year. There are multiple catalysts keeping Palantir’s shares surging. However, investors should tread carefully going forward.

Not only is PLTR’s valuation way too high, but people may be overly enthusiastic for its new AI Platform that has yet to prove itself. Below are 3 reasons Palantir stock is a “Hold” for me.

Q1 Earnings and Palantir Stock

In the beginning of 2023, Palantir’s share price experienced mixed performance, but into the second and subsequent quarters, the software firm’s share price started to lift.

A string of better-than-expected earnings reports as well as the announcement of Palantir’s new AI Platform back in August helped PLTR shares rally 167.4% in 2023.

The rally extended in 2024 with a positive fourth quarter earnings report for 2023 that saw revenue beat estimates due to demand for AIP. In fact, AIP registered 600 pilot tests in 2023, 6x more than in 2022.

Palantir also clocked in high sales year-over-year growth rates for its commercial business, underscoring strides to diversify away from the intelligence and defense community the firm has heavily relied upon in the past.

However, Palantir’s first quarter earnings report for 2024 finally underwhelmed investors. Although the data analytics firm beat revenue estimates, market watchers thought full-year guidance was lackluster.

People had been hoping for a major boost to guidance off of AI, like the got in the first quarter, but that didn’t happen.

The AI Platform Has Yet to Prove Itself

In essence, Palantir’s AI Platform layers in both artificial intelligence and machine learning tools as well as the advanced large language models onto Palantir’s two major platforms: Gotham and Foundry.

For better context, Gotham is data-centric operating system for decision making in the defense and intelligence industries. Foundry, on the other hand, is similar data analytics platform geared toward a variety of enterprises, including financial institutions and healthcare providers.

Back in 2022, had already been piloting AIP and administered 100 pilot tests, so investors were delighted to hear Palantir had increased the number of pilots 600 in 2023.

For investors, this meant there was a lot of interest in Palantir’s AI software, indicating the stock could probably see a Nvidia-like surge in sales and profits. That has yet to materialize, however, as I stated above.

The gull year guidance that the company gave during the first quarter earnings release suggested there may be some hype regarding the AI Platform.

The investment bank Jefferies (NYSE:JEF) had downgraded Palantir stock in January based off of that assertion. It seems like they may have been right.

Palantir’s Forward P/E is 86x forward earnings

The biggest thing Palantir investors (or would-be investors) should worry about is the company’s outrageous valuation. Despite what the subreddit forum r/wallstreetbets might have you think, Palantir trading at 84.6x forward earnings is most likely untenable.

Moreover, if this hype is strictly due to optimism about Palantir’s AI Platform, I would say the multiple is, again, unjustified.

Nvidia (NASDAQ:NVDA), the key supplier of AI-powering semiconductor chips, trades at about half of where Palantir does current, from a valuation perspective, and there are analysts already sounding the alarm about Nvidia’s valuation.

That is all to say, if Palantir disappoints again with guidance, investors should expect a harsh market rout

On the date of publication, Tyrik Torres 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) and positions in the securities mentioned in this article.