Palantir Technologies Inc. has seen a meteoric rise of over 161% this year, outpacing Wall Street’s typical price targets and raising analyst concerns about its lofty valuation. Trading at over 100 times future earnings, Palantir is one of only 17 S&P 500 stocks trading more than 5% above consensus targets. CEO Alex Karp, however, remains dismissive of sceptical analysts, emphasizing the company’s long-term potential and resilience in high-stakes tech.
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By Jonathan Levin ___STEADY_PAYWALL___
No matter how much they torture their models, sell-side stock analysts just can’t come up with a justification for Palantir Technologies Inc. stock to go higher. The Peter Thiel-backed data analytics and artificial intelligence company, known for its highly sensitive work with the Department of Defense, has surged by more than 161% this year and blown past the typical Wall Street price target for the next 12 months.
Here’s how my Bloomberg News colleague Carmen Reinicke put it last week:
…analysts don’t expect the winning streak to continue, with the average target implying a decline of more than 30% in the next 12 months — the most downside seen for any stock in the US benchmark, according to data compiled by Bloomberg.
Their caution mainly stems from Palantir’s lofty valuation. The shares trade at more than 100 times future earnings, a hefty premium over other AI names, some of which are also considered too pricey by investors.
What’s interesting about this — and slightly encouraging — is that brain-breaking valuations are becoming much less common among large capitalization US stocks. At the time of writing, Palantir is among only 17 S&P 500 Index stocks trading more than 5% above consensus target prices compiled by Bloomberg.
When markets are caught up in speculative fevers, the number of gravity-defying stocks is typically many times higher than that. Overall, only about 68 stocks in the index are at or above their targets.
Stocks can break Wall Street’s models for a variety of reasons, and they don’t always point to a bearish turn. Sometimes these episodes involve forward-looking companies that analysts simply can’t fully understand (often tech or biotech, but sometimes also consumer companies with a unique but underappreciated cultural resonance). On other occasions, there may be a surprisingly encouraging macro backdrop that the market sniffs out before Wall Street can be fully persuaded (as in mid 2020). But then on other occasions — in fact, many many other occasions — the market just gets ahead of itself, and the momentum carries rallies way too far.
Palantir could be a hard-to-understand juggernaut or an example of sentiment-driven excess. Like many such companies, it’s engaged in technically complex work and boasts an element of cultish fandom. Chief Executive Alex Karp is a quirky and brilliant doctor of neoclassical social philosophy, with an Einsteinian poof of curly gray hair, who founded the company some two decades ago with entrepreneur Stephen Cohen and Thiel, the billionaire tech investor. Named after the magical Lord of the Rings stones that imbued users with the ability to see great distances, its tools have been used for law enforcement, counterterrorism and high stakes warfare. Hardcore bulls have suggested that its technology could be set for widespread private-sector adoption. Is it worth $100 billion, who knows?
For his part, Karp himself sure doesn’t think much of the analysts running the numbers that imply his company is overvalued. Here’s how he put it last week on CNBC (emphasis mine):
Intelligent people learn from their mistakes and learn to realize when they made a mistake and the pattern. Everyone else becomes an analyst or an advisor… People have been saying we’re overvalued for the last 20 years. People have been saying our products wouldn’t make us profitable, that we would not be able to become a juggernaut, that we would not become GAAP profitable, we would not get in the S&P… Keep saying that about us. We love it. It discourages people from doing anything like what we are doing, and we are winning.
As he alludes to, Palantir has often been perceived as “overvalued” relative to analysts’ models, and the disconnect has reached current extremes on a few previous occasions (notably, in late 2020 and 2023). The difference is that on those occasions it was part of a larger pack of price-target defying companies. Now, it’s the exception on an index packed overwhelmingly with reasonably valued stocks with straightforwardly discernible upsides.
Two years and 68% into the S&P 500’s rally, there are plenty of investors who’ve become nervous that the index’s gains are overdone. Clearly, at 21.9 times blended forward earnings, it isn’t cheap, and — as always — there are countless risks that could knock shares off course. Those include the risks of major conflict in the South China Sea or the Middle East, the risk that Donald Trump will get elected and start a new trade war, and that companies’ artificial intelligence investments won’t immediately lead to profits. Equally as important, there’s the possibility that the Federal Reserve won’t deliver as many interest rate cuts as markets had been expecting.
That backdrop may lead some to eschew the tech-heavy market-cap weighted S&P 500 in favor of an equal-weighted alternative, and perhaps even balance their bets with some bonds and gold. Still, it’s hard to find signs of extreme and widespread excesses, even of the sort that were prevalent in late 2023. Investors mostly seem to be hewing to the assessments of fundamental analysts, separating the wheat from the chaff even as the index has ground higher.
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