Prediction: Palantir Has 4 Wall Street Sell Ratings, and This Figure Will More Than Double in the Coming Months

Key Points

• Wall Street analysts have an overwhelming "buy" bias, with only 4.9% of the 12,319 ratings on S&P 500 stocks (as of late June) representing sell ratings.

• Analysts have been bullish on artificial intelligence (AI) juggernaut Palantir Technologies due to the irreplaceability of its platforms and its recurring profits.

• Though only four out of 24 Wall Street analysts rate Palantir stock the equivalent of a sell, its inexplicable valuation premium is likely to send this figure notably higher.

• 10 stocks we like better than Palantir Technologies ›

History has taught investors that being a long-term optimist is a smart decision. The analysts at Crestmont Research examined more than a century of rolling 20-year total returns, including dividends, for the benchmark S&P 500 and discovered that all 106 rolling 20-year periods they analyzed would have generated a positive annualized total return.

This realization that the stock market's major indexes have a propensity to climb in value over time has led to an overwhelming "buy" bias for Wall Street analysts. According to data from FactSet Insight, there were 12,319 ratings on stocks in the S&P 500, as of late June. A whopping 56.4% of these ratings were the equivalent of "buy," 38.7% were "hold," and only 4.9% were the equivalent of "sell."

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Despite this buy bias on Wall Street, history also tells us that not all stocks climb in value, nor do they rise in a straight line when increasing in value over time. Although sell ratings are exceedingly rare, there's one high-flying stock, which has returned 2,130% since the end of 2022, that could be a sell rating magnet for Wall Street analysts in the coming months: Palantir Technologies (NASDAQ: PLTR).

Palantir Technologies blows away Wall Street's loftiest expectations

Based on analyst ratings aggregated by LSEG Data & Analytics (formerly Refinitiv), 24 Wall Street analysts have weighed in on Palantir Technologies. Five rate it as the equivalent of a strong buy or buy, 15 list it as a hold or market perform, and four have it rated the equivalent of underperform or sell.

There's a reason analysts have been overwhelmingly bullish on Palantir -- and it has to do with more than the historical precedent of Wall Street's major stock indexes rising over long periods.

To begin with, analysts appreciate Palantir's unique positioning and sustainable moat. The company's two premier artificial intelligence (AI)- and machine learning-driven operating platforms, Gotham and Foundry, have no large-scale competitors. When Palantir lands a client, it tends to hang onto them.

To build on this point, Palantir is capable of producing highly predictable operating cash flow quarter after quarter. Its Gotham platform aids federal governments with military mission planning and execution, as well as data collection and analytics. The contracts signed for this segment commonly stretch out four or five years. Meanwhile, Foundry is a subscription-based model geared at businesses that often leads to high retention rates.

Palantir also dazzled Wall Street by flipping into the recurring profit column ahead of expectations. While Gotham accounts for the lion's share of its operating income, shifting to recurring profits demonstrates the validity of Palantir's AI-focused, dual-platform model.

To round things out, Wall Street analysts have likely anticipated strength in Palantir's operations following Donald Trump's November victory and Republicans winning both houses of Congress. Historically, Republicans haven't been shy about increasing defense spending. President Trump's focus on internal AI innovation and protecting America's security interests plays right into the hands of Gotham.

Image source: Getty Images.

Prediction: Wall Street sell ratings on Palantir are about to become commonplace

But there's also the real possibility Wall Street's love affair with Palantir is going to end sooner rather than later. Even though Palantir offers a sustainable moat and, thus far, a sales growth rate that's hovered in the 25% to 35% range on an annual basis, there are a few headwinds Wall Street analysts won't be able to overlook.

Firstly, there's the realization that all game-changing innovations need ample time to mature. Despite all the hoopla surrounding artificial intelligence and AI stocks like Palantir, there's a strong possibility that investors have, once again, overestimated how quickly this new technology will gain mainstream adoption and/or utility.

If an AI bubble were to form and burst, Palantir stock wouldn't be immune. While its multiyear government contracts (via Gotham) and subscriptions (via Foundry) would insulate its revenue from falling off a cliff, investor sentiment during bubble-bursting events would make Palantir stock a target.

Secondly, there's only so much growth that can be squeezed out of Gotham with a limited list of potential clients. Though it's great having the U.S. government as a core customer, only the U.S. and its immediate allies can access this sensitive platform. As time passes, this is going to limit Gotham's growth potential.

But the No. 1 reason sell ratings on Palantir can more than double in the coming months is the company's inexplicable valuation.

To be clear, I absolutely do believe Palantir stock is worthy of a valuation premium. Any company that can deliver double-digit sales growth with a sustainable moat deserves a valuation premium, relative to its peers. But there's a limit as to how far this premium can carry a stock.

PLTR PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.

Prior to the bursting of the dot-com bubble in the late 1990s and early 2000s, leaders like Microsoft, Cisco Systems, and Amazon peaked at price-to-sales (P/S) ratios ranging from 31 to 43. Throughout history, this P/S ratio range of 30 to 40 has commonly served as a top for market-leading businesses on the cutting edge of a next-big-thing innovation.

As of the closing bell on July 9, Palantir Technologies' P/S ratio clocked in at 114! That's one hundred and fourteen, with no missing decimal points! No megacap stock in the history of Wall Street has ever been able to maintain a premium P/S multiple of this magnitude. Even if Palantir were able to grow its sales by 30% annually through 2029, its P/S ratio would still be 31 heading into the turn of the decade. This is how far out of whack Palantir's valuation is at the moment.

The vast majority of hold ratings on Palantir have attached price targets that are significantly below the $143.13 per share it closed at on July 9. I believe these analysts will struggle to justify any additional increase in their respective price target given Palantir's inexplicable P/S premium.

It's simply a matter of time before the valuation-based sell ratings from Wall Street begin to stream in.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Cisco Systems, FactSet Research Systems, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.