Many tech and artificial intelligence (AI) stocks trade at huge valuations, implying big earnings growth in the years to come, which is why investors are so bullish on these companies. They are buying earnings and growth in the future. The fintech SoFi Technologies(NASDAQ: SOFI) and the artificial intelligence company PalantirTechnologies(NYSE: PLTR) both fit this description. Each has had a big year, with SoFi's stock up over 41% this year and Palantir's up over 296%.
With 2024 winding down, Wall Street is forecasting 48% earnings growth for one and a whopping 115% earnings growth for the other, according to data provided by Visible Alpha. Is Wall Street too optimistic about these stocks?
Palantir: 48% earnings growth
Analysts expect Palantir's diluted earnings per share to rise from $0.21 this year to $0.31 in 2025, implying a nearly 48% upside. Nine brokers provided estimates, with a low estimate of $0.25 and a high estimate of $0.42. Companies and governments use Palantir's software to analyze vast amounts of data. The platform bridges the gap between complex AI and machine-learning language models and human analysis.
For example, the government uses Palantir in its counter-terrorism efforts to analyze and visualize data from unrelated sources to detect patterns and gain actionable insights. Palantir has raised awareness for its platform with its Artificial Intelligence Platform boot camps. The company allows customers to test out its platform and helps them use the tech to solve real problems with their business.
It's easy to see how Palantir's products could be useful for nearly every sector. What's unclear is how differentiated Palantir is and whether that constitutes a true moat. You could probably say this about most AI businesses right now. Some believe Palantir is a leader, while others are less inclined to agree with its huge valuation.
After a stellar run for the stock, some analysts believe it will be more difficult to maintain the growth because the company will be up against difficult comparables. Palantir's 48% earnings growth is nothing to sneeze at but it likely doesn't justify this kind of valuation.
PLTR PE Ratio (Forward) data by YCharts
SoFi: 115% earnings growth
The fintech company SoFi aims to serve customers' financial needs by providing bank accounts, personal budgeting tools, an investment platform, and loans including mortgages, student loans, and personal loans. SoFi also has a tech division that sells products and services that help power core banking activities for banks and other companies looking to add financial services.
The stock is up nearly 37% this year and has a market cap of over $14.3 billion. A big part of SoFi's business is growing its student and personal portfolios to drive more net interest income, and also selling loans to investors. Lower interest rates should help this aspect of the company because lower interest rates will lower deposit costs over time and bring more investors back into the market, which gives SoFi more capacity to originate and sell loans. The incoming administration of President-elect Donald Trump may also be good for SoFi's student loan business, which struggled during President Joe Biden's administration due to a years-long student loan moratorium and uncertainty around Biden trying to push through student loan forgiveness. Lower interest rates could also help quell investor concerns over credit quality.
Additionally, SoFi's tech business may benefit from banks finally gaining visibility into regulatory capital rules. One part of SoFi's tech business involves selling cloud-based core-processing banking technology that helps banks power their daily banking activities. Pushing these sales through can take a long time. I'm guessing many bank boards have had their hands full managing their balance sheets through the high interest rate environment and preparing for higher regulatory capital rules. A more conducive environment for banks may allow them to pull the trigger on some of their new initiatives including these deals.
Wall Street analysts expect SoFi to generate $0.28 of diluted earnings per share, up from a projected $0.13 this year, suggesting a 115% upside next year. The low estimate is $0.22 and the high estimate is $0.35. The trajectory of interest rates will be important for SoFi, with more rate cuts being more beneficial.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
