Palantir Shares Are Defying Increasingly Skeptical Analysts

(Bloomberg) -- Palantir Technologies Inc. is confounding skeptics, with the stock continuing to push higher even as some on Wall Street question its sky-high valuation and the sustainability of the company’s revenue growth.

Shares in the artificial intelligence software maker are up more than 250% this year, with a chunk of the gains coming since last week’s estimate-beating earnings. Donald Trump’s election victory has also added momentum, with bulls pointing to management connections to Trump and the potential for an AI push by the new administration to boost sales. The stock was slightly lower in early trading Thursday.

The latest rally has propelled Palantir’s already-pricey valuation even higher. The shares trade at around 135 times forward earnings, a huge premium to the average ratio of companies in the Nasdaq 100 Index at about 27 times. It’s also the most expensive stock in the S&P 500 Index on an enterprise value-to-revenue basis. For some, the gains have gone too far, with two analysts downgrading the stock in the past week.

The “fundamentals are alive,” but Palantir would have to accelerate sales growth to 40% for four straight years and trade at 12 times its estimated 2028 revenue just to hold its stock price, Jefferies analyst Brent Thill wrote, saying that this “seems unlikely.” Consensus estimates are for 26% growth this year and 24% the following year, according to data compiled by Bloomberg. Thill cut the stock to underperform, citing its unsustainable valuation.

Argus Research analyst Joseph Bonner echoed the sentiment. “Palantir shares, which have about tripled in value this year, may be getting ahead of what the company fundamentals can support,” Bonner wrote, cutting the stock to hold.

“Palantir specializes in catering to a small segment of organizations with highly complex IT challenges, which could lead to uneven results that the market tends to punish in highly-valued tech stocks,” he added.

Wall Street’s ambivalence about the stock is reflected in analyst data tracked by Bloomberg. Of 20 firms covering the company, half have hold or equivalent ratings, while three rate Palantir a buy and 7 recommend selling. The average target implies 39% downside — a huge gap with current trading that may also be partly explained by Palantir’s retail investor base, who are among its biggest supporters.

There are other signs that some think the rally has run too far. Short sellers betting against Palantir have lost more than $3.6 billion on paper this year as the stock surged, according to data from S3 Partners LLC. But they’re doubling down on bets that the stock will drop, with data showing that short interest as a percentage of Palantir’s float has risen from 2.8% in early September to 4.6% this week.

On the flip side, Trump’s decisive election victory has given bulls a new reason for optimism about the company, which gets more than half of its revenue from government contracts.

DA Davidson’s Gil Luria, who has a neutral rating on the stock, sees Palantir benefiting from close ties with Trump, given that CEO and co-founder Alex Karp, co-founder Joe Lonsdale and chairman Peter Thiel are “all very well-networked with this administration.”

Palantir’s vision is “congruent with the ideology of Trump and his administration,” particularly regarding a “clarity of vision around only selling to Western countries,” Luria said in an interview, adding that the company is the “flag-bearer for patriotic US businesses.”

Wedbush Securities analyst Dan Ives — a long-time Palantir bull — thinks the company will be able to win more government contracts in an AI push by the new administration. “We expect major AI initiatives within the US government including the Department of Defense that would also be a major tailwind,” he wrote.

Still, even Ives’ Street-high $57 price target has been eclipsed in the past week, underlining the speed and magnitude of Palantir’s latest rally, and the challenge for investors in calling the top.