Palantir stock drops as analyst cuts to sell, sees nearly 20% downside risk

Palantir (NYSE:PLTR) stock fell more than 1.6% in premarket trading Thursday after the software company witnessed its first Wall Street downgrade in more than a month. The analyst who cut the PLTR rating also issued a new price target, implying a downside risk of almost 20%.

Palantir stock downgraded to Sell

On Thursday, analysts at Monness, Crespi, and Hardt downgraded Palantir stock from Neutral to Sell, citing “egregiously rich valuation” following the company’s AI-driven nearly 200% rally over the past year.

The brokerage firm issued a 12-month target price of $20 for PLTR, which is over 18% lower than the stock’s last closing price.

“In our view, Palantir is well positioned to benefit from the long-term AI trend and capitalize on volatile geopolitics,” analysts wrote in a note.

However, they note challenges including inconsistent government contract revenues, uneven execution, and high valuation, all while “the darkest days of this economic downturn are ahead of us,” they added.

Based on its estimates, the analyst team identified Palantir stock as having the highest valuation within their enterprise software sector, surpassing all other companies in their coverage spectrum.

They utilize enterprise-value-to-revenue ratios for assessing valuations, with PLTR trading at 17.0x their forecasted 2025 revenue. This figure is almost three times the sector's average of 6.3x, excluding Palantir.

Despite its premium valuation compared to the top three fastest-growing peers—Snowflake Inc (NYSE:SNOW), Datadog (NASDAQ:DDOG), and MongoDB (NASDAQ:MDB)—Palantir's expected revenue growth stands at 20% for 2024, which is lower than those companies' growth projections.

“Moreover, the number of shares outstanding is excessive, and we believe it will take years for Palantir to grow into its current valuation,” analysts commented.

“When dividing our CY:24 revenue estimate by Palantir’s diluted share count, we calculate $1.13. By comparison, our enterprise software coverage currently averages $17.72, and the three high-growth companies highlighted above average $14.76,” they added.

Since launching its Artificial Intelligence Platform (AIP) in the first half of 2023, Palantir has seen its stock surge 167% in 2023 and an additional 43% this year, notably outperforming the wider market.

Historically utilizing traditional AI, the company pivoted to generative AI following OpenAI's ChatGPT reveal in November 2022, mirroring a broader industry shift.

Palantir stock forecast

Monness, Crespi, and Hardt’s downgrade of Palantir stock is the first such move since February, when HSBC analysts trimmed their rating from Buy to Hold.

In the more recent period, the big data analytics software maker has continued to witness positive reactions on Wall Street.

Earlier this month, Wedbush’s team upped their 12-month price objective on PLTR from $30 to $35, implying more than 40% upside from the latest closing price.

The move came as “Messi of AI,” as Wedbush analysts call it, begins to “gain inflection point momentum with AIP."

The broker said its latest field checks on Palantir stock reveal increasingly optimistic sentiments, as it's believed that the "launching pad of AI use cases" is how many U.S. enterprises are beginning to view the AIP foundation.

"Customers across industries are continuing to find use cases with AIP creating major cross-sell opportunities in the pipeline," Wedbush wrote.

"With a strong product portfolio coupled with AI, we expect PLTR to garner a meaningful share of what we believe to be a $1 trillion AI Global TAM as enterprise and government ecosystems rush to implement useful platforms for automating complex workflows."

However, it’s important to note that Wedbush is among the most bullish brokerage firms when it comes to PLTR.

Based on data from the past 12 months, the average price target on the stock is actually $19.29, suggesting over 21% downside from current levels.