Why Is Wall Street So Bearish on Palantir Stock? There's 1 Key Reason.

Key Points

• Just five out of 20 Wall Street analysts give Palantir a buy rating.

• The business has delivered impressive results, but the valuation has gotten stretched.

• The stock could move higher from here but it's at risk of a sharp pullback.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) has been one of the biggest winners of the AI boom. The deep data analytics stock has seen its revenue growth accelerate and its operating margin expand, thanks in part to the launch of its Artificial Intelligence Platform (AIP).

The stock was the top performer on the S&P 500 last year and has doubled so far this year, defying some expectations of a pullback. However, Wall Street seems to be turning increasingly bearish on the stock.

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According to Tipranks, just five out of the 20 analysts rating the stock call it a buy. Of the remainder, 13 call it a hold, while two give it a sell rating. The average price target on the stock is $155, implying 7% downside.

While more analysts rate the stock a buy than a sell, sell ratings tend to be rare on Wall Street, and hold ratings are typically understood as cautious or sometimes a euphemism for sell. By comparison, 58 of the 65 analysts covering Nvidia rate it a buy or a strong buy.

The reason for the cautiousness around Palantir is clear.

Image source: Getty Images.

Valuation, valuation, valuation

While Palantir's business results have clearly been impressive, the main reason the stock has soared is multiple expansion, rather than underlying business growth. As a result, Palantir's price-to-sales ratio has jumped to 119, a level that's more than triple that of any other S&P 500 stock.

That level simply isn't sustainable over the long term. Palantir could grow into it over time, bringing it down gradually, or the stock could crash if the business doesn't live up to expectations.

We saw a flash of this recently when the stock fell by 15% in a single week in August on little news, though it has recovered some of those losses.

Looking ahead, Palantir stock could continue to move higher, but some cautiousness is warranted given its sky-high valuation.

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Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.