Shares of Palantir Technologies (PLTR +3.16%) have been on a blistering run, thanks to the growing adoption of artificial intelligence (AI) and the company's AI-centric data mining software, which helps businesses make real-time, data-driven decisions. During the past year, the stock is up 161% (as of this writing), and over three years, the stock has gained a massive 2,160%.
Yet Wall Street continues to take a dim view of the stock. Of the 24 analysts who proffered an opinion in December, only 17% rate it a buy or strong buy. That level of pessimism is usually befitting a poor performer, yet Palantir's results have been exemplary.
One factor that goes a long way toward explaining Wall Street's bearish view is the stock's frothy valuation.
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Not for the faint of heart
Palantir's third-quarter financial report was superb. Revenue growth accelerated 63% year over year to $1.18 billion, fueling earnings per share (EPS) that soared 200%. The results were driven by Palantir's U.S. commercial revenue that surged 121% and now accounts for 34% of sales.
However, with Palantir's stratospheric growth has come a commensurate rise in its valuation. The stock is currently selling for 405 times earnings and 113 times sales. Even the price/earnings-to-growth (PEG) ratio -- which is more growth-oriented -- clocks in at 3.4, when investors look for a multiple of 1 or less for an undervalued stock. By any measure, Palantir Technologies stock is extremely overvalued -- at least over the short term. This could be the catalyst for a significant correction in the stock price of 50% (or more).
The news isn't all bad. Wall Street expects the company to grow revenue by 41% annually over the coming five years. If that's accurate (and using its current profit margin for illustration), Palantir's revenue would grow to $24 billion, generating $9.7 million in profits and driving its market cap to $2.4 trillion.
This highlights the importance of holding for the long term. It also shows that while Wall Street is bearish, Palantir can still be a massive winner over the long term.
