Palantir Technologies stock (NYSE:PLTR) started out serving the defense and intelligence sectors by providing comprehensive data analytics products. Back then, Peter Thiel was at the helm of the firm. Nowadays, Palantir has broadened its horizons to servicing customers in healthcare, energy, and finance industries with both on-premises and cloud software solutions. At the end of 2023, Palantir counted 497 companies amongst its broad customer base.
The data analytics firm has made significant strides in improving profitability and rolled out a new Artificial Intelligence Platform (AIP) rolled out late last year. However, as I have pointed out in previous pieces, the market seems to be overvaluing the company’s shares, which has risen approximately 186%. It seems now Palantir’s high valuation is coming to haunt to shareholders. Over the past week, shares have fallen nearly 6% and could fall down further as investors begin to reassess how expensive U.S. equities have become over the past months.
Below are 3 reasons why investors dump their Palantir shares.
AI Platform is Just AI Hype For Now
In the latter half of 2023, Palantir Technologies stock released AIP. Subsequently, during the company’s Q3 results, overall revenue increased 17% to $558 million from $478 million a year earlier. However, most notably, Palantir’s “U.S. Commercial business segment” increased revenue figures by 37% on a year-over-basis driven by demand for Palantir’s Artificial Intelligence Platform. The data analytics firm’s AIP can deploy commercial and open-source large language models onto internally held data sets and, from there, recommend business processes and actions.
In their fourth quarter report, CEO Alex Karp noted there was strong demand for AIP. The company completed 600 pilot tests in 2023. The Investment bank Jefferies notably downgraded Palantir to “Hold” in early January due to “AI hype,” and while PLTR shares have since then appreciated, I believe skeptics like the Jefferies analysts and many others, provided a crucial warning signal. The AI Platform is still in its “testing “pilot” phase, and future growth, at least for now, is not guaranteed.
Financials Aren’t Sound
Since the market seems to be waking up on overvalued companies, let’s take a look at Palantir’s lauded financials. Growth in revenue and EPS were definitely substantial in 2023, but the company’s elevated “stock-based compensation” (SBC) expense should cause analysts and investors to scrutinize Palantir’s non-GAAP metrics. In the company’s Q4 report, for example, SBC came in at $132.6 million and was the largest add-back line-item to get the “adjusted operating profit” figure. Palantir’s adjusted operating profit margin sat around 34% in Q4. If we count SBC as a real expense, margins would have been around 11%.
Similarly, “adjusted EBITDA” would have plunged to the slow double digits if stock-based compensation were taken out of the add-back mix. A high SBC brings about an important debate on the company’s overall profitability.
Wall Street Downgrades
Last week, Palantir Technologies stock received a fresh downgrade from brokerage firm Monness, Crespi and Hardt. The broker downgraded PLTR from “Neutral” to “Sell”, calling its valuation “egregiously rich valuation.” Similarly, Jefferies stuck to the “Hold” rating the bank had downgraded Palantir to a few months earlier.
Palantir’s remarkable rally in 2023 and 2024 has led to a subsequent rise in equity valuation. The data analytics company’s shares have risen 34% on a year-to-date basis. Moreover, shares are trading at 70.5x forward earnings.
Because a lot of PLTR’s valuation has been inflated by AI speculation, it’s hard not to compare to a stock like Nvidia (NASDAQ:NVDA), which has not only benefitted from the same AI craze but is a crucial component to the world of AI as we know it. Nvidia valuation has crept upward since I have mentioned it in prior articles; the stock now trades at 36.4x forward earnings, which is still well below Palantir’s P/E multiple.
On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.