Why Is Wall Street So Bearish on Palantir? There's 1 Key Reason.
Key Points
Palantir Technologies is a battleground stock.
The lofty valuation is fueling volatility, and the stock will likely fall dramatically at some point over the next year or so.
Over the long term, however, Palantir's accelerating revenue and profit growth will likely drive huge gains.
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Shares of Palantir Technologies (NASDAQ: PLTR) have been on a blistering run, thanks to the growing adoption of artificial intelligence (AI) and the company's AI-centric data mining software, which helps businesses make real-time, data-driven decisions. During the past year, the stock is up 161% (as of this writing), and over three years, the stock has gained a massive 2,160%.
Yet Wall Street continues to take a dim view of the stock. Of the 24 analysts who proffered an opinion in December, only 17% rate it a buy or strong buy. That level of pessimism is usually befitting a poor performer, yet Palantir's results have been exemplary.
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One factor that goes a long way toward explaining Wall Street's bearish view is the stock's frothy valuation.
Image source: Getty Images.
Not for the faint of heart
Palantir's third-quarter financial report was superb. Revenue growth accelerated 63% year over year to $1.18 billion, fueling earnings per share (EPS) that soared 200%. The results were driven by Palantir's U.S. commercial revenue that surged 121% and now accounts for 34% of sales.
However, with Palantir's stratospheric growth has come a commensurate rise in its valuation. The stock is currently selling for 405 times earnings and 113 times sales. Even the price/earnings-to-growth (PEG) ratio -- which is more growth-oriented -- clocks in at 3.4, when investors look for a multiple of 1 or less for an undervalued stock. By any measure, Palantir Technologies stock is extremely overvalued -- at least over the short term. This could be the catalyst for a significant correction in the stock price of 50% (or more).
The news isn't all bad. Wall Street expects the company to grow revenue by 41% annually over the coming five years. If that's accurate (and using its current profit margin for illustration), Palantir's revenue would grow to $24 billion, generating $9.7 million in profits and driving its market cap to $2.4 trillion.
This highlights the importance of holding for the long term. It also shows that while Wall Street is bearish, Palantir can still be a massive winner over the long term.
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Danny Vena, CPA has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
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