Palantir Technologies (PLTR 0.39%) is a popular stock with retail investors, and there have been multiple catalysts that have helped it reach new highs this year. The company has been delivering strong results, and the stock's inclusion in the S&P 500 has given investors more reason to invest in it than before. Since the start of the year, shares of the data analytics company have soared by 160%.
The stock shows no signs of slowing down, with its market cap now around $100 billion. Is now as good a time as any to jump onto the Palantir bandwagon, or should you brace for a possible correction?
NASDAQ: PLTR
Key Data Points
Palantir has blown past analyst price targets
According to data from Yahoo! Finance, the average analyst price target for Palantir is $28.85. But as of Wednesday, the stock closed at just under $45 -- or 56% higher than the average.
Analyst price targets can and do change, especially after a company reports earnings numbers and provides updated guidance. As the business is doing better, upgrades can follow. But they can quickly go in the opposite direction as well, if the company's results prove to be underwhelming.
Analyst price targets can be a helpful guide, nonetheless, in gauging just how much optimism and hype there is behind a stock. And with Palantir, there's clearly a ton of it, given how highly valued the stock is -- not only compared to analyst price targets, but based on many popular valuation metrics as well. Currently, the tech stock is trading at the following multiples:
- 264 times earnings.
- 43 times revenue.
- 25 times book value.
Valuations have clearly taken a backseat when it comes to Palantir's stock, which does imply strong conviction and interest from retail investors, who have shown in the past (e.g., with meme stocks) that they are willing pay high and egregious valuations for companies that they like.
A good company, but arguably not good enough to warrant a valuation this high
Palantir's business has improved considerably over the years and with the rollout of its Artificial Intelligence Platform (AIP), which has unlocked new growth opportunities. In its latest earnings report, for the period ending in June, revenue grew by 27% year over year to $678 million. The bottom line's improvement was even more significant, jumping from $28.1 million a year ago to more than $134.1 million this past quarter.
The company would need to continue to grow its profits at a rapid pace for its valuation to appear more reasonable. But with management projecting quarter-over-quarter revenue growth of just 3% for the current period, that doesn't appear likely to happen. Even though the business is growing faster than it has in the past, the premiums the stock trades at are simply too high to make the case that Palantir isn't wildly overvalued.
Should you buy Palantir stock?
There's a lot of excitement and bullishness in the market these days, and I think that's at least part of the reason Palantir's stock is as high as it is. Unfortunately, with shares already soaring to an egregious valuation, it's difficult to predict how high it may end up, since retail investors have proved that they can take stocks to extremely high prices, even when the underlying fundamentals may not warrant such enthusiasm.
I don't think the stock has peaked, at least not until there is a bearish reason for investors to start to sour on it, such as an earnings miss or uninspiring guidance. Until that happens, I wouldn't be surprised if the stock keeps rallying, even though the valuation may prove to be unsustainable in the long run.
Due to the volatility and extremely high valuation that Palantir trades at, this isn't an investment I would put in my portfolio -- the risk of a steep correction is always looming. This is a stock that looks to be priced for perfection.
