The S&P 500(SNPINDEX: ^GSPC) measures the performance of 500 companies that meet specific eligibility requirements, including positive earnings over the last four quarters, a market value of at least $18 billion, and a sufficiently liquid stock. The S&P 500 is generally considered to be the best barometer for the overall U.S. stock market.
Palantir Technologies(NYSE: PLTR) will join the benchmark index on Monday, Sept. 23, the date of the next quarterly rebalancing. Palantir shares have skyrocketed 370% since January 2023, a period that essentially coincides with the generative artificial intelligence boom started by ChatGPT.
However, Wall Street analysts are less than optimistic, despite Palantir's increasingly strong position in artificial intelligence software. The stock carries a median 12-month price target of $28 per share, implying 12% downside from its current share price of $32. Here's what investors should know.
Palantir is a recognized leader in artificial intelligence platforms
Palantir specializes in data analytics. Its platform lets businesses collect data, develop machine learning models, and integrate those digital assets into an ontology. The Palantir ontology defines the relationship between those assets and real-world objects, and it lets users surface information through analytical applications that improve decision-making. Management says its ontology-based architecture is its key differentiator.
The Palantir platform comprises several software products. Foundry is used for data processing and analytics, AIP (Artificial Intelligence Platform) lets customers use large language models and generative artificial intelligence within Foundry, and Apollo ensures Foundry is consistently updated across all IT environments. Palantir also provides an alternative to Foundry (called Gotham) originally designed for sensitive government data.
Forrester Research recently recognized Palantir as a leader in artificial intelligence and machine learning platforms. "Palantir is quietly becoming one of the largest players in this market," analysts wrote. Palantir received the highest score for its current product offering, but three competitors -- Alphabet, Databricks, and C3.ai -- received higher scores for their product development strategy.
Palantir's revenue growth continued to accelerate in the second quarter
Palantir reported solid financial results in the second quarter, beating estimates on the top and bottom lines. Revenue increased 27% to $678 million, marking the fifth consecutive sequential acceleration in sales growth. Meanwhile, non-GAAP net income increased 80% to $0.09 per diluted share.
Additionally, Management guided for 25% to 26% revenue growth in the third quarter, comfortably topping the 22% growth analysts anticipated. "The persistent and unbridled demand for our software, for an effective enterprise platform that makes artificial intelligence capabilities useful to large institutions, shows no signs of relenting," CEO Alex Karp wrote in his latest shareholder letter.
Palantir stock trades at an outrageous valuation
Looking ahead, Wall Street expects Palantir's adjusted earnings to increase at 22% annually through 2025. Without additional context, that estimate sounds pretty good. However, Palantir shares currently trade at 100 times adjusted earnings, an outrageous multiple in context. Those figures give a PEG ratio of 4.5.
For perspective, Nvidia currently trades at 47 times adjusted earnings and Wall Street expects its bottom line to grow at 49% annually over the next six quarters, which is the same timeframe I quoted for Palantir. Those figures give a PEG ratio slightly below 1.
Here's what that means: If the market afforded Palantir the same PEG multiple it affords Nvidia, Palantir stock would plunge 30%. Personally, I would avoid the stock until it trades at a more reasonable valuation. That does not mean Palantir shares will nosedive tomorrow. The stock could continue climbing higher in the near term. But without a dramatic acceleration in earnings, I think shares are headed toward a sharp correction at some point in the future
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
