Since the start of 2023, no trend has been responsible for triggering investor excitement quite like artificial intelligence (AI). Giving software and systems the capacity to reason and act autonomously, as well as dangling the ability for machines to evolve over time, gives this technology a mouthwatering ceiling -- and Wall Street has taken notice.
Based on estimates from PwC, AI can boost global gross domestic product by 26% come the turn of the decade. This is north of a $15 trillion impact that can lift the fortunes of a laundry list of companies. But as investors also know, not every company necessarily benefits from a next-big-thing trend.
Although Nvidia has cemented itself as the face of the AI revolution, a strong argument can be made that AI-driven data-mining special Palantir Technologies (PLTR -4.04%) has replaced it as Wall Street's AI darling. At its February peak, shares of Palantir were approaching a nearly 2,000% trailing-two-year gain.
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But like many companies on the cutting-edge of a highly touted innovation, Palantir finds itself at the center of a Wall Street analyst duel. Based on the high-water and bottom-barrel price targets from select analysts, Palantir stock could soar 46% or plunge 53%. Let's briefly examine each argument and determine which is more likely to come to fruition.
Palantir's biggest bull sees shares climbing to $125
On one end of the spectrum is Palantir's biggest cheerleader, Mark Schappel of Loop Capital Markets. Schappel has a buy rating on Palantir and a lofty price target of $125 per share, which would lead to 46% upside, based on the $85.85 close on March 28. Coincidentally, $125 is essentially where the company's stock peaked on Feb. 18.
One of the primary reasons most Wall Street analysts have expected Palantir stock to move higher is its unique positioning. This is a company with two core operating platforms -- Gotham and Foundry -- of which there are no large-scale replacements. While Palantir does have pockets of competition, the AI-empowered software-as-a-service solutions it provides aren't duplicable. This leads to highly predictable sales and cash flow generation.
Analysts also appreciate the recurring profitability and steady double-digit sales growth of its Gotham platform. This segment caters to federal governments by providing data collection and analysis, along with military mission planning and execution. Palantir typically lands multiyear contracts with the U.S. government, providing heightened cash-flow transparency.
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But what really has Schappel excited about the future is Palantir's enterprise opportunity with Foundry. This relatively newer (but rapidly growing) platform is designed to help businesses make sense of their data in order to improve their operating efficiency. Foundry can be tasked with everything from integrating data and optimizing supply chains to making data-driving automated decisions that free up human personnel.
When 2024 came to a close, Palantir had just 571 commercial customers, which represents a blistering 52% increase from the prior-year period. Foundry is just scratching the tip of the iceberg with its potential.
Palantir's top skeptic foresees its stock falling to $40
Meanwhile, RBC Capital Markets' Rishi Jaluria, who's been a longtime Palantir pessimist, has an underperform rating on the stock and believes its shares will plunge to $40. If Jaluria is accurate, this would result in an additional 53% downside from where shares ended the previous week.
Jaluria has been critical of Palantir's valuation for quite some time. While it's not abnormal for businesses with sustained competitive moats to trade at a premium, Palantir's price-to-sales (P/S) ratio hovered around 100 when it reached its peak in mid-February. No company on the leading edge of a next-big-thing investment trend has ever sustained a valuation this aggressive dating back decades.
PLTR PS Ratio data by YCharts.
In addition to Palantir's lofty valuation, Jaluria has concerns about U.S. defense budget cuts. President Donald Trump's efforts to reduce wasteful spending and cut costs will see the Pentagon cut 8% of its budget in each of the next five years, which amounts to about $50 billion annually. Palantir's bread-and-butter has been its steady influx of new defense contracts with the U.S. government.
To build on this point, Gotham has been Palantir's primary profit driver. Yet Gotham is only available to the U.S. and its immediate allies. In other words, Gotham's long-term ceiling is somewhat limited by a narrow pool of potential clients.
A February note from Jaluria also points to the new trading plan for CEO Alex Karp as a worry. Karp's revised trading plan allows him to sell close to 10 million shares of stock through mid-September, which may provide downside pressure on shares of Palantir.
Will Palantir Technologies soar 46% or plunge 53%? History offers a big clue...
Now for the all-important question: Which price target extreme is more likely to come to fruition?
Although Palantir has, technically, achieved Schappel's price target on a brief intra-day basis, history points to a greater likelihood of longtime bear Rishi Jaluria being correct.
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One of the biggest headwinds for the artificial intelligence revolution is that every game-changing technology/innovation for more than 30 years has navigated its way through a bubble-bursting event. With regularity, investors have overestimated how quickly new technologies will be adopted on a mainstream basis, leading to lofty expectations eventually not being met.
The silver lining for Palantir is that Gotham secures multiyear contracts and Foundry is a subscription-driven operating segment. If the AI bubble does burst, as history suggests it will, it's unlikely that Palantir's sales would endure an immediate hit. Nevertheless, sentiment-driven trading would be expected to weigh down companies with exorbitant valuation premiums.
The other issue that simply can't be overlooked is valuation. Last summer, Nvidia peaked at a P/S ratio of 42 before rolling over. Likewise, market leaders prior to the bursting of the dot-com bubble topped out at 31 to 43 times sales. Palantir sporting a P/S ratio of roughly 100 in February, or even north of 70 currently, simply isn't sustainable, based on what historical data tell us.
Furthermore, the S&P 500's Shiller price-to-earnings ratio hit its third-highest multiple during a continuous bull market in December. Extended valuations of this magnitude have typically been a harbinger of downside for the stock market.
While a valuation premium is warranted for Palantir, its stock could easily lose half of its value and still be priced aggressively for future growth.
