Shares of Palantir have surged 181% this year as investors bet on its potential in the booming artificial intelligence race. But as its valuation hovers at a premium and shares trade near $18, many Wall Street analysts have come to question whether the market is letting excitement around AI outweigh the business fundamentals. So far this year, Nvidia has dominated as the poster child of the generative AI push, with shares more than tripling as the chip maker dominates the market for graphics processing units underpinning large language models (LLMs). As big technology stocks surged, the group lately referred to as the “Magnificent Seven” was responsible for the majority of the first half’s gain. Palantir has ridden their coattails. The company, founded in 2003, is already making strides in AI, even lending its tools to hospitals . In its latest earnings release in early May, CEO Alex Karp called demand for Palantir’s AI platform, which allows commercial and government sectors to use LLMs with their own private data, “without precedent.” Shares popped more than 23% the day after the results. While some analysts see promise in Palantir’s AI capabilities, many remain cautious on the immediate profit contribution the technology and view the stock as ripe for a pullback. Only 13% of analysts have a buy or overweight rating on shares, according to FactSet, with the average price target implying nearly 41% downside. “It has to be a show me story and, right now, any of their forward-looking metrics have not indicated a robust demand for AI solutions that would merit this lofty a valuation,” said Morningstar analyst Malik Ahmed Khan. ‘Work in progress’ Many analysts and investors remain bullish on the long-term vision for Palantir, but say tailwinds from AI are tough to quantify. In the meantime, the stock remains richly valued. Palantir’s forward price-to-earnings multiple for the next 12 months is 77 times earnings. D.A. Davidson’s Luria called the valuation unjustified given Palantir’s prospects for growth and current growth rate, expecting shares to give up most of their recent gains. Raymond James analyst Brian Gesaule said the premium share price makes finding a catalyst for shares “more challenging.” In a note to clients in May, Morgan Stanley’s Keith Weiss noted that the rally in Palantir shares and premium valuation creates an unfavorable near-term risk-reward. While the AI platform may be a new growth vector, it remains a “work in progress” given the lack of a monetization plan, he said. PLTR YTD mountain Shares since the start of 2023. “Our strategy is to just take the whole market,” Karp said on a May earnings call regarding AI. “We have no pricing strategy. We’re going to create a lot of value. We’re going to get hundreds of customers, and we will price it as we go.” Despite heightened mentions of AI on Palantir’s recent call, Morningstar’s Khan said the Denver-based company failed to show any “marked improvement” in forward metrics such as billings and deferred revenue. He said he would need to see financial evidence, such as acceleration in many of those metrics, to consider raising his $9-a-share price target, which implies more than 48% downside from Monday’s close. “I think it’s a bit early to jump on that train and say that Palantir is going to benefit greatly from AI,” he said. Mizuho’s Matthew Broome echoed similar concerns in a May note to clients, saying that while Palantir may be “well-placed to manage secure AI deployments,” it’s still “too early to assess” whether it will be successful. “While there is clearly significant enterprise customer interest in generative AI solutions, we do not believe Palantir is necessarily in a position to capitalize on this demand and translate it into significant acceleration this year, given how new their generative AI products are and the complexity of implementations,” said D.A. Davidson’s Luria. — CNBC’s Michael Bloom contributed reporting
