Palantir continues climbing, even in the face of Wall Street bears.
Palantir Technologies (PLTR 1.87%) is one of the most widely owned stocks among retail investors. It’s currently the seventh-most owned stock on Robinhood Markets, despite its station outside the top 25 U.S.-listed companies by market cap.
Indeed, retail investors have been the driving force behind the stock’s current momentum, which has led it to return more than 106% so far this year. Wall Street analysts have been sending warnings to retail investors for months that the company can’t support the current stock price, but the stock continues to go up. That’s only made analysts more bearish as a group, with just seven of 29 analysts rating the stock a buy or the equivalent, as of this writing.
Is it finally time to start listening to Wall Street, or are the experts wrong about this one?
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Why retail investors love Palantir
Palantir offers investors the ability to buy into a company that’s leveraging generative artificial intelligence (AI) to fuel growth of its commercial business, while also winning increasingly large contracts from the government. Government contracts are typically long-term and much less cyclical than enterprise customers. That gives Palantir a solid revenue base to continue scaling the business on top of.
To that end, its Artificial Intelligence Platform (AIP), released in 2023, has been a massive growth driver for its U.S. commercial business. AIP allows users to plug in a large language model and use natural language to interact with its software platform. That allows less technical users to harness the power of Palantir’s data ontology software, which connects disparate data sets to provide actionable insights for users across multiple domains.
The financial results speak for themselves. Palantir grew sales 48% in its most recent quarter, including a 93% jump in U.S. commercial revenue. That came with an expansion of adjusted operating margin to 46% from 44% in the previous quarter. That puts its Rule of 40 score, the sum of its revenue growth rate and operating margin, at 94.
Retail investors are loving what they’re hearing. Palantir is growing revenue quickly at a very large scale. On top of that, it’s profitable and showing operating leverage as it scales.
As a result, it deserves a premium valuation. But Wall Street thinks that valuation has climbed to unsupportable levels.
The most expensive stock in the S&P 500
Wall Street expects Palantir’s revenue to continue growing at a very strong pace over the next few years. Analysts model revenue growth of about 35% for both 2026 and 2027, with stronger earnings growth as its profit margins expand.
But even with those high growth expectations, the stock valuation is too expensive for most of Wall Street to recommend. Famed short-seller Andrew Left went so far as to say, “I’ve stopped even looking at the ratio because it’s become so absurd. … There’s never been a company that has that type of multiple or that type of P/E that’s not corrected 50%.”
Palantir shares sport a forward P/E ratio of about 240 as of this writing. Its price-to-sales ratio hovers around 90. That makes it, by far, the most expensive stock in the S&P 500 (^GSPC 0.21%).
Palantir will have to drastically outperform analysts’ expectations to justify those multiples. Even if it grew revenue at 50% per year, it would still take about three years with the stock going absolutely nowhere for it to trade at a valuation that’s just “expensive” instead of “absurd.”
That explains why Wall Street sees much more downside for Palantir than upside. The lowest price target on Wall Street is over 70% lower than its stock price as of this writing. The highest is just 37% higher.
So who’s right?
I think Wall Street is right in this case. While Palantir is executing at a high level, the momentum in the stock driven by retail investors piling into the shares has pushed the price way too high. That makes the stock a much more risky way to invest in artificial intelligence than would be implied by its status as a government contractor.
Benjamin Graham is famously quoted as saying, “In the short run, the stock market is a voting machine, but in the long run, it is a weighing machine.” While Palantir is racking up a lot of votes, it’s not gaining enough weight to merit all of them.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.