Palantir’s AI-Driven Rally Has Gone Much Too Far for Wall Street

(Bloomberg) -- After a 150% rally that’s added about $60 billion in market value, Wall Street thinks Palantir Technologies Inc. has gotten way ahead of itself.

Most Read from Bloomberg

• Oman Sees an Urban Future Distinct From Dubai and Abu Dhabi

• Booming Cambridge Exposes England’s Widening Wealth Gap

• Climate Change Is Killing Buildings in Slow Motion

• Transportation Policy Gets Left Behind in Presidential Race

• How Kyiv Became a Leader in Digital Services Amid Wartime Strain

Shares in the company, which makes data analysis tools for companies and governments, have soared this year, helped by its inclusion in the S&P 500 Index in September and its success in leveraging artificial intelligence. But analysts don’t expect the winning streak to continue, with the average target implying a decline of more than 30% in the next 12 months — the most downside seen for any stock in the US benchmark, according to data compiled by Bloomberg.

Their caution mainly stems from Palantir’s lofty valuation. The shares trade at more than 100 times future earnings, a hefty premium over other AI names, some of which are also considered too pricey by investors. Nvidia Corp. has a multiple of about 37 times forward earnings, while software firm Oracle Corp., which has also been riding AI-related tailwinds, trades at just 26 times.

Palantir shares “need to consolidate stellar gains over the last couple of years and grow into its rich valuation,” Raymond James analysts led by Brian Gesuale wrote in a recent note, downgrading the stock. The rally mean Palantir has “no room for error” when it reports earnings next month, he added.

Palantir shares rose as much as 2.2% in early trading Thursday.

While Palantir is now the third-best performer on the S&P 500 this year, behind Vistra Corp. and Nvidia, analysts are unusually negative for an AI-exposed name. Among 21 firms tracked by Bloomberg, only four recommend buying the stock, while ten have hold ratings and seven rate it a sell. The company’s co-founder and chief executive officer, Alex Karp, has a love-hate relationship with Wall Street, and has said that analysts don’t understand the company.

Still, shares have kept on soaring, helped by the success of Palantir’s AI tools, which have pulled in new customers including CBS Broadcasting, General Mills Inc. and Aramark Services Inc. this year. The company has also continued to win big contracts with government agencies in the US and allied countries, with government revenue making up the majority of overall sales.

Some Palantir investors agree that the stock may see volatility after the huge rally.