Palantir Technologies(NASDAQ:PLTR) has been one of the hottest stocks on the market in recent months. Stocks are up 320% year-to-date as of December 5 on enthusiasm for artificial intelligence (AI). This makes Palantir the most successful member of the S&P500(INDEXSNP: ^GSPC) This year.
The company is currently worth $165 billion, but Wedbush Securities' Dan Ives thinks 'Palantir could be next Oracle” This statement might have caught the attention of more investors if Ives had chosen (for lack of a better word) a trendier comparison, but the implications are still enormous for shareholders.
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Oracle is a $500 billion company (200% more than Palantir), with a strong presence in several enterprise software verticals, including analytics and business intelligence platforms. Ives doesn't expect Palantir's shares to rise 200% over the next 12 months, but instead believes the company can reach that valuation over the next three to four years.
What makes this call particularly surprising is that most experts remain skeptical about Palantir. Among the 20 analysts who follow the company, the stock has a median price target of $38 per share. This implies a 47% decline from the current stock price of $72.
Here's what investors should know about Palantir.
Palantir helps commercial and government organizations make sense of complex data. Its flagship products, Gotham and Foundry, enable customers to integrate information and machine learning (ML) in analytical applications. And it is AI The AIP platform adds support for large language models and generative AI to its core software products.
In August, Forrester Search recognized the company as a leader in AI/ML platforms. Analysts wrote: “Palantir is quietly becoming one of the biggest players in this market.” And in September, Dresner Advisory Services listed Palantir as a top vendor in its 2024 AI/ML and Data Science Software Market Study.
This puts the company in a good position. (IDC) estimates that spending on AI platforms will grow 41% annually through 2028. Meanwhile, Grand View Research expects the data analytics software market to grow 27% annually. % until 2030.
Palantir checked all the right boxes with its third-quarter financial report. The company beat expectations, raised its full-year guidance and provided an encouraging outlook for the business. Total revenue rose 30% to $725 million, the fifth consecutive sequential acceleration, and non-GAAP net income climbed 43% to $0.10 per diluted share.
Particularly important was sales growth of 40% to U.S. government customers, an acceleration of 24% in the second quarter and 12% in the first quarter. Chief Financial Officer Dave Glazer attributed the rise to new contract awards that reflect growing demand for AI in government software. For example, Palantir recently won a $100 million contract that will expand its Maven Smart battlespace awareness system to more U.S. military personnel.
Looking ahead, management now expects full-year revenue to grow 26%, 3 percentage points faster than the company previously forecast. However, this forecast implies that revenue will increase 26% in the fourth quarter, which would represent a deceleration from 30% in the third quarter.
Image source: Getty Images.
Palantir stands to benefit as organizations in the commercial and government sectors use AI analytics to improve labor productivity and operational efficiency. But the valuation is rather worrying. Wall Street expects adjusted earnings to grow 25% annually through 2027, making the current price-to-earnings (P/E) ratio of 205 absurdly expensive.
Wedbush analyst Dan Ives thinks Wall Street is underestimating the extent to which Palantir will benefit from the increase in demand for AI software. He estimates profits could grow 15% to 20% faster than analysts expect. But the current valuation still seems unreasonable, even in this scenario. Indeed, DA Davidson's Gil Luria recently said Palantir is trading at “an unprecedented premium” to other software companies.
Ives doesn't seem concerned about valuation, but he also sees very little upside in the near term. Although he has said Palantir could be the next Oracle, and once referred to the stock as “probably the best name in pure play AI,” Ives' 12-month target price of $75 per share only implies a 4% upside from the current stock price of $72.
Personally, I think investors should avoid this stock for now. Palantir is executing well on what promises to be a huge market opportunity, but the current valuation seems disconnected from the company's fundamentals. My opinion may cause some short-term regret if Palantir's stock continues to rise, but I think investors will have the opportunity to buy at a much cheaper price in the future.
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Trevor Jennevine holds positions at Palantir Technologies. The Motley Fool holds positions and recommends Oracle and Palantir Technologies. The Mad Motley has a disclosure policy.
