Palantir Technologies (PLTR 3.73%) stock rocketed higher following the release of its latest earnings report on Feb. 5. The AI software developer reported a high level of customer enthusiasm and demand that has investors optimistic about the company's near-term prospects.
Shares are up more than 50% to $25.41 since the company announced its fourth-quarter and year-end results for 2023. However, HSBC analyst Stephen Bersey downgraded the stock from buy to hold with a $22 price target last week. Here's what triggered the analyst's downgrade and what it means for investors.
Is it too late to buy Palantir stock?
Wall Street's constant downgrades and upgrades are usually not that meaningful for long-term investors, but they can highlight opportunities or problem areas investors should be aware of. In this case, the analyst is still positive on Palantir's future growth, but he believes the stock's recent rally has gotten ahead of itself and needs to cool off.
Palantir currently trades at a very high price-to-earnings ratio of 76 based on Bersey's forward earnings estimates. The analyst noted this is more than double other software stocks he follows, which means the shares might be overbought.
However, Palantir's valuation doesn't look all that expensive when considering the growth expectations for this company. The consensus estimate has Palantir growing earnings at a compound annual rate of 47% over the next three to five years. This impressive outlook is likely based on the high margins it earns on incremental revenue. And Palantir's adjusted free cash flow margin currently sits at an impressive 50%, which reflects a highly profitable business, even by software industry standards.
Palantir could very well continue to outperform the market from here given the long-term runway in AI software spending. Management reported accelerating growth in the rate of new customer acquisitions last quarter, so it's possible the company could beat its own guidance for the year, which would support the stock at these levels.
