The artificial intelligence (AI) market has experienced remarkable growth, surpassing $184 billion — an impressive jump of nearly $50 billion from last year. This rapid increase is expected to continue, with projections indicating the market will exceed $826 billion by 2030. This boom is fueled by advancements in AI technologies and increased investments across sectors like healthcare and finance. Companies harnessing AI are seeing substantial gains, and Palantir Technologies (PLTR), is no exception. The data analytics firm's stock has soared over 66% year-to-date, driven by the growing adoption of AI and strong financial performance.

However, as Palantir gears up to release its Q2 2024 earnings report in early August, the stock's remarkable rise has attracted scrutiny. Despite the bullish sentiment around AI, many analysts remain cautious about Palantir's prospects. In one of the latest brokerage warnings, one analyst has even recommended selling the stock ahead of the earnings report. 

So, what's behind Wall Street's contrarian stance on PLTR amid the AI boom? Let's explore the factors behind this recommendation.

PLTR’s Financial Performance So Far

Valued at $63.7 billion, Palantir Technologies (PLTR) is a software company that specializes in big data analytics. Founded in 2003 by Peter Thiel, Palantir has become a significant player in data analysis and artificial intelligence. While the firm originally generated a large amount of its business from assessing threats for governments and public agencies, Palantir's commercial segment is beginning to contribute a greater percentage to the top line.

As of July 18, 2024, Palantir's stock trades at $28.61, near its 52-week high of $29.30, doubling from a low of $13.68. The stock has surged 67.68% year-to-date, making investors take notice. 

Palantir's valuation metrics are striking. With a price-to-sales ratio of 23.64 and a forward P/E ratio of 86.76, the stock appears overvalued compared to even the ultra-profitable giants of AI - think Nvidia (NVDA) and Microsoft (MSFT). 

This rich valuation, which is possibly one of the most common criticisms levied against PLTR by analysts, makes the stock highly vulnerable to any signs of slowing growth or missed expectations. 

PLTR Gaps Lower on Q1 Beat

That seems to be what happened in early May, when PLTR sold off despite beating Q1 revenue expectations.

In Q1 2024, Palantir reported a 21% revenue increase year-over-year, reaching $634 million and beating estimates of $625.43 million. This marked the company's sixth consecutive quarter of GAAP profitability, with net income of $106 million and in-line earnings per share (EPS) of $0.04.

However, the stock dipped 7% in response to the earnings announcement, as lower-than-expected full-year guidance dampened investor enthusiasm.

Analysts Take Sides on Palantir Stock

Palantir Technologies finds itself at the center of a heated debate among analysts, with conflicting views on its valuation and growth potential. 

Mizuho recently downgraded Palantir to "Underperform," citing concerns about the company's "low quality" earnings beats and limited earnings visibility. Analyst Matthew Broome raised the stock's price target slightly to $22, but expressed skepticism about the sustainability of recent growth and transparency in Palantir's commercial business. 

And, in a nod to that lofty valuation, Mizuho also warned that "following the material 67% rise in the shares YTD, we find it increasingly difficult to justify PLTR’s high multiple."

Echoing that cautious stance, Jim Cramer recently voiced frustration over Palantir's business visibility, likening the company to a "giant black box." He suggested that clearer communication about their operations would be beneficial. 

On the flip side, Barchart's own Mark Hake, CFA, offers a more optimistic perspective. Hake's analysis suggests that Palantir could achieve a 30% free cash flow (FCF) margin, potentially generating $975 million in FCF by 2025 based on projected sales of $3.25 billion. 

Using a 1.25% FCF yield valuation metric, Hake estimates Palantir could reach a market value of $78 billion, translating to a price target of $35 per share. This represents a 22.5% upside from current levels. Hake's bullish stance is supported by Palantir's robust revenue growth and the increasing adoption of its AI-driven platforms in both government and commercial sectors.

Adding to the bullish outlook, Bank of America recently added Palantir to its best-of-breed stocks list, while Wedbush analyst Dan Ives has highlighted Palantir as a key beneficiary of the ongoing "AI party." 

Ives, who holds the Street-high price target of $35 for PLTR, argues that its massive installed bases in both enterprise and consumer spaces position it well to capitalize on the AI wave. 

Out of 15 analysts, the consensus rating is to hold the stock. This includes three "Strong Buys," one "Moderate Buy," five "Holds," one "Moderate Sell," and five "Strong Sell" ratings, reflecting a rather unusually diverse set of opinions among Wall Street pros. The mean price target of $22.07 suggests a potential downside of about 22.8% from Palantir's Friday close, confirming that analysts believe the stock is significantly overvalued at current levels.

Despite the mixed analyst ratings, the debate around Palantir's future remains vibrant, with the upcoming Q2 earnings report likely to be a critical factor in determining its trajectory.

The company's Q2 2024 earnings release is set for Aug. 5, and analysts expect an average EPS of $0.04 for the current quarter, with revenue expected at $652.47 million. For the full fiscal year 2024, analysts predict an average EPS of $0.16, translating to an expected 100% growth rate from the previous year.

What's Driving Growth at Palantir?

Despite the tepid analyst outlook, Palantir Technologies is generating attention with several significant partnerships that will enhance its position in the AI and space technology sectors. One of the most notable collaborations is with Voyager Space, a leader in space exploration. This strategic partnership aims to integrate Palantir's cutting-edge AI tools across Voyager's operations, accelerating advancements in space and defense technology.

Oracle (ORCL) teamed up with Palantir in another significant development to mark a new chapter in cloud computing and AI. Palantir's Foundry Platform and Artificial Intelligence Platform (AIP) are now certified on Oracle Cloud Infrastructure (OCI) and available across all of Oracle's cloud deployment options. This collaboration aims to enhance efficiency, performance, and security for businesses and governments worldwide.

Plus, keep an eye on Palantir's substantial progress in the corporate sector. Palantir's Artificial Intelligence Platform (AIP) is driving impressive growth, with U.S. commercial revenue up 40% year-over-year in Q1 2024. The company's innovative AIP bootcamps, which have seen over 1,300 completions worldwide, are helping to fuel this expansion. 

With a remaining deal value of $4.1 billion, up 22% from the prior year, and performance obligations up 39% year-over-year to $1.3 billion, Palantir's future looks bright as AI adoption accelerates across industries.

Conclusion

So, should investors look to sell Palantir stock ahead of its earnings report? Despite PLTR's impressive 66% year-to-date surge and strong AI-driven growth, valid concerns about its high valuation and limited earnings visibility have led to a cautious stance. Mizuho's pre-earnings downgrade to “Underperform” highlights these issues, as well as the prospect for another possible post-report sell-off. 

While bulls point to upside for AI potential and partnerships, the mixed analyst ratings and lofty valuation suggest caution is still warranted. With Q2 earnings approaching, investors should brace for potential volatility, and be wary of making any bold moves on Palantir.

On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.