The S&P 500(SNPINDEX: ^GSPC) is widely regarded as the best barometer for the overall U.S. stock market. The index tracks 500 domestic companies that meet specific inclusion requirements concerning market value, profitability, and liquidity.
Last month, S&P Global announced that Palantir Technologies(NYSE: PLTR) would be added to the S&P 500 on Sep. 23. Dan Ives at Wedbush Securities called it a "validation moment for the Palantir story." Shares have advanced 22% since the annoucement, but one analyst still sees huge upside on the horizon.
Hilary Kramer, portfolio manager at Greentech Research, recently told Fox Business that Palantir could be a $100 stock in the future. While she did not discuss a specific timeline, her forecast implies 170% upside from the current share price of $37.
Here's what investors should know.
Palantir is a market leader in artificial intelligence platforms
Palantir's primary platforms, Foundry and Gotham, let businesses capture data, develop machine learning (ML) models, and integrate those assets into an ontology. The ontology defines the relationships between digital information and real-world counterparts. Users can interact with the ontology through analytical applications to improve decision-making. Palantir says its ontology layer is a "key differentiator."
In 2023, Palantir launched its Artificial Intelligence Platform (AIP), adding support for large language models and generative AI to Foundry and Gotham. Experts have praised the product. In August, Forrester Research recognized Palantir as a leader in AI/ML platforms, highlighting strengths in data ingestion and preparation, and intuitive user interfaces and automation. "Palantir is quietly becoming one of the largest players in this market," analysts wrote.
The bodes well for Palantir and its shareholders. The International Data Corp. (IDC) expects AI platform sales to increase at 51% annually through 2028.
Palantir sees an unrelented wave of demand for AIP
Palantir delivered a strong performance in the second quarter, beating estimates on the top and bottom lines. Revenue increased 27% to $678 million and non-GAAP net income soared 80% to $0.09 per diluted share. CEO Alex Karp said, "The steady ascent of our profit reflects the unbridled demand for and understanding of the capabilities of our software." Management also raised full-year guidance, such that revenue is now forecasted to increase 23% in 2024.
Karp also commented on AIP in his shareholder letter. "Our flagship artificial intelligence platform (AIP) was launch just over a year ago. And it has already transformed our business," he wrote. "Our growth across the commercial and government markets has been driven by an unrelenting wave of demand from customers for artificial intelligence systems that go beyond the merely performative and academic."
Palantir has continued make headlines since the quarter ended. In September, it extended its relationship with longtime customer BP; the oil and gas company will deploy AIP to improve operational efficiency. Additionally, Bloomberg reported that the U.S. government awarded Palantir a $100 million contract that will makes its AI targeting tools available to more military personnel.
Palantir's stock trades at a very expensive valuation
Palantir is an interesting company with a strong presence in a quickly growing industry, but its valuation is in the stratosphere. Wall Street expects Palantir's adjusted earnings to increase at 22% annually through 2025. Meanwhile, the stock trades at 115 times adjusted earnings.
Those figures give a PEG ratio above 5. For context, PEG ratios of 1 or 2 are generally seen as reasonable. That means Palantir's stock is outrageously expensive at its current price. Not surprisingly, Wall Street analysts are generally bearish on the company. The stock's median price target of $27 per share implies 27% downside from its current share price of $37.
Barring an extreme acceleration in earnings growth, I doubt Palantir will come anywhere close to $100 per share in the near future. And I would personally avoid this stock until the valuation falls back to Earth. There are plenty of other stocks poised to benefit from the AI boom that trade at more reasonable prices.
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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends BP, Palantir Technologies, and S&P Global. The Motley Fool has a disclosure policy.
