Should you buy Palantir stock after it soars 170% in 2024? Wall Street has a clear answer for investors

Palantir Technologies (PLTR 5.57%) The stock price has risen 170% since January as investors grew more confident in the company's artificial intelligence (AI) software. This makes Palantir the third best-selling stock in the world S&P 500 (^GSPC 1.90%) the course of the year so far. Only Vistra And Nvidia were more worthwhile investments.

However, Wall Street is overwhelmingly bearish on Palantir. Among the 23 analysts who follow the company, the median price target is $28 per share. That represents a 40% decline from the current share price of $47. Additionally, since the median refers to the mean, this means that half of analysts expect a downside of more than 40%.

Here's what investors should know about Palantir and its red-hot stock.

Palantir is a leading provider of artificial intelligence platforms

Palantir specializes in big data analytics. Its core software products, Foundry and Gotham, enable companies to capture information and develop machine learning (ML) models. The adjacent AIP product adds natural language processing capabilities to Foundry and Gotham, enabling customers to integrate large language models into analytical applications.

Together, these products enable companies to integrate data and models into an ontology, a digital representation of the real world that defines the relationships between physical objects. Users can explore ontology data and gain insights using out-of-the-box tools or custom analytics applications. Palantir's ontology-based architecture differentiates its software from competing solutions.

Importantly, Palantir has received high praise from several industry observers. Forrester Research recently recognized its leadership in AI/ML platforms. AIP received a higher rating for its current capabilities than any other product, and analysts wrote, “Palantir is quietly becoming one of the biggest players in this market.”

Dresner Advisory Services also listed Palantir as one of the best-rated providers in two recent market studies. The first report examined artificial intelligence, data science and machine learning software. The second report examined software for model operations, a discipline concerned with managing models throughout their lifecycle – from development and deployment to monitoring and maintenance.

Palantir just announced exceptional third-quarter financial results

Palantir beat high expectations with its third-quarter financial report on November 4, beating estimates on revenue and profit. Customer numbers increased 39% to 629, and the average existing customer spent 18% more. In turn, revenue rose 30% to $726 million, the fifth straight increase, and non-GAAP earnings rose 43% to $0.10 per diluted share.

“The release of our newest platform, AIP, has transformed our business,” wrote CEO Alex Karp in his latest letter to shareholders. “Our company’s growth is accelerating and our financial performance is exceeding expectations as we meet the continued demand from our U.S. government and commercial customers for the most advanced artificial intelligence technologies.”

Image source: Getty Images.

Palantir stock is absurdly expensive compared to Wall Street's earnings estimates

Looking ahead, International Data Corp. estimates (IDC) predicts AI platform revenue will grow 41% annually through 2028. This should boost demand for AIP, which in turn should be a tailwind for Palantir's business. But investors shouldn't confuse a good business with a good stock. Palantir shares are absurdly expensive at their current valuation.

To elaborate, Wall Street expects the company's adjusted earnings to rise 17% over the next 12 months. That makes the current multiple of 133 times adjusted earnings seem like wild overvaluation. These numbers give Palantir a PEG ratio of 7.8. For comparison, PEG ratios above 2 are generally considered expensive. But a value close to 8 is simply off the charts.

In this context, Wall Street's median price target of $28 per share seems entirely plausible, meaning Palantir stock could actually fall 40%. Potential investors should steer clear and existing shareholders should consider reducing their positions. However, there is no guarantee that Palantir shares will lose momentum any time soon. Investors who reduce their exposure today should not reconsider their decision if the stock continues to rise in the coming weeks and months.