Palantir Technologies, the high-profile data analytics company known for its work with government agencies, saw its stock price fall sharply this week after a prominent Wall Street analyst warned that enthusiasm around the company’s artificial intelligence capabilities had gotten ahead of itself.
Jefferies Downgrades Palantir, Calling It “Overhyped” on AI
On Wednesday January 4th, analysts at Jefferies downgraded Palantir from “hold” to “underperform”, cutting their price target from $9 to $7. In a note to clients, the analysts said Palantir was “overhyped” when it came to the progress of its artificial intelligence and machine learning efforts:
“The thrust of our downgrade is that the stocks price has disconnected from the fundamentals of the business which are deteriorating as high incremental R&D spend yields little,” Jefferies’ analyst Brent Thill wrote. “Investor excitement around PLTR’s ability to grow into its elevated valuation hinges on product ambitions in areas like artificial intelligence – where promise seems ahead of reality.”
The downgrade sent Palantir shares tumbling nearly 4% in pre-market trading on Thursday. It represents a striking change of sentiment around a stock that had been a Wall Street favorite, with Palantir making many analysts’ top stock picks lists for 2023 just days earlier.
Palantir Was Seen as a Top AI and Software Stock for 2024
As recently as January 3rd, multiple analysts had sung Palantir’s praises, naming it one of their top stock picks for 2024. Writing for CNBC, Michael Bloom said:
“Wall Street loves this stock so much that five analysts named it a top pick in one day.”
The bull case for Palantir centered on its push into artificial intelligence and machine learning to improve its data analytics offerings. With new AI-powered products like Apollo for Edge AI, Palantir was expected to significantly expand its total addressable market.
In a Nasdaq article on January 4th, Matt McGinley explained the rationale:
“Palantir expects to leverage its expertise in managing and analyzing complex data sets to build a leading artificial intelligence platform…If Palantir succeeds, its $22 billion total addressable market could expand to $100 billion or more over the next decade.”
Is the Promise of AI a “Bridge Too Far”?
However, in their downgrade note, Jefferies analysts warned Palantir may have bitten off more than it can chew with its aggressive AI expansion, calling it a “bridge too far”:
“Betting on PLTR requires assuming that the company: 1) can continue adding customers/expanding within its existing customer base at the same pace it has recently; 2) can achieve mid-teens operating margins someday without much revenue growth; 3) can successfully penetrate huge new TAMs in AI/ML against some of the most sophisticated AI competitors in the world,” Thill wrote. “That seems a bridge too far to us.”
Thill noted that Palantir’s R&D budget has swelled to nearly $1 billion, hurting profitability, but so far its AI product efforts have not gained much traction.
Stock Could Have Further Downside in 2023
In addition to the Jefferies downgrade, another bearish analyst report this week warned Palantir stock could have significant downside this year. Writing for Morningstar, analyst Dan Romanoff said:
“We think the stock could fall by 20% or more in 2023 amid what we see as an unsustainably high valuation,” Romanoff wrote. He set a fair value estimate of $7 per share.
Romanoff believes Wall Street’s expectations that Palantir will significantly expand operating margins while simultaneously reinvesting heavily in new technologies is unrealistic.
If other analysts follow Jefferies lead in downgrading the stock, it could put further pressure on Palantir’s valuation.
Palantir Stock Key Stats
| Metric | Value |
|---|---|
| Market Cap | $23B |
| Forward P/E | 50x |
| Price/Sales | 12x |
| Profit Margin | -26% |
Data from SimplyWallSt as of January 5th 2024
What’s Next For Palantir
Palantir still has its share of bullish supporters, who believe the recent stock decline represents a buying opportunity.
Investorplace analyst Thomas Yeung thinks Palantir could double again in 2024, driven by commercial revenue growth and operating leverage. However, he notes Palantir faces risks from plateauing government revenue and potential dilution from stock-based compensation.
Most analysts expect volatility in the stock this year as the market reassesses Palantir’s growth opportunities and path to profitability. Upcoming quarterly results will be critical, as Palantir will need to demonstrate traction with its new product initiatives while controlling costs.
If AI and ML product sales fail to materialize as hoped, or operating margins stagnate, more downgrades could pressure the stock further. For now, Palantir finds itself at a crossroads – it has promised a bold AI-led expansion, but needs to prove it can deliver. How Wall Street reacts in the months ahead will determine whether this weeks’ plunge was just the beginning or if Palantir can get back in analysts’ good graces.
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