Since its listing in 2021, Palantir has risen by 2500%. Is a "245 times PE" expensive?

Since its IPO in 2021, Palantir's stock price has soared nearly 2500%, with a projected price-to-earnings ratio of 245 times, making it the most expensive company in the S&P 500 index. Bullish investors are desperately seeking rational support for this valuation level.

The stock price of this data analytics company hit a new all-time high last Friday, with a year-to-date increase of nearly 150%. Analysts believe that the rapid growth of AI applications, its business relationships with the U.S. government, and the latest impressive financial report have driven this surge.

In contrast, the forward price-to-earnings ratio of fellow market darling chipmaker Nvidia is only 35 times. Analysts estimate that Palantir needs to generate $60 billion in revenue over the next 12 months to reach a valuation level comparable to its peers.

Data shows that the number of analysts giving the stock a sell or hold rating is more than double those giving it a buy rating, reflecting a general sense of unease on Wall Street. Nevertheless, investors worried about missing further upside opportunities still choose to hold the stock.

Valuation Bubble Raises Analyst Concerns

Palantir's current valuation level far exceeds that of its peers. According to Bloomberg Intelligence analyst Damian Reimertz, based on the comparison of enterprise value to sales revenue, the company needs to achieve $60 billion in revenue over the next 12 months to match its peers' valuation levels.

This figure is significantly higher than Wall Street's expectations of $4 billion in revenue for fiscal year 2025 and $5.7 billion for fiscal year 2026.

Gil Luria, head of technology research at DA Davidson & Co., estimates that Palantir needs to maintain a 50% annual growth rate and a 50% profit margin over the next five years to bring its projected price-to-earnings ratio down to 30 times, in line with companies like Microsoft and AMD.

Mark Giarelli from Morningstar Investment Services has given the stock a sell rating, stating, "Palantir is becoming a difficult valuation story to sell."

There are numerous examples of stock prices cooling off when companies fail to meet Wall Street's high expectations. Tesla's stock price has fallen nearly 20% this year, partly because the company's performance has not kept pace with its high valuation of about 148 times projected earnings.

Mark Giarelli also warned that while Palantir performed well in its recent financial report, its high valuation could exacerbate sell-offs if the company encounters problems in the future.

Bulls Bet on Long-Term Growth Potential

Bullish investors are betting that Palantir's business performance will support its stock price in the long term, similar to the path taken by many large tech companies today.

Streaming company Netflix traded at over 280 times its projected earnings during its peak in 2015, and its current projected price-to-earnings ratio is 40 times Que Nguyen, Chief Investment Officer of Research Affiliates, stated: "Palantir is indeed part of the AI craze, but not all stocks with a valuation of 200 times are bubbles."

Mark Malek, Chief Investment Officer of Siebert Financial, acknowledged that valuation remains a concern, but Palantir's growth potential keeps him holding the stock:

"Buying at these levels is indeed uncomfortable, but we are not afraid to buy when the stock is overvalued. Where else can you find a 30% growth rate?"

In addition, some portfolio managers view Palantir as a must-have stock to avoid lagging in relative performance. David Wagner of Aptus Capital Advisors said:

"There are many investors who simply cannot ignore it. They don't believe in the stock, but they are tired of the damage it has done to them in relative performance."

Brent Bracelin of Piper Sandler raised the target price from $170 to $182 after the earnings report and maintained an overweight rating.

He hopes the company can continue to grow positively and maintain a high free cash flow margin before 2030, benefiting from a $1 trillion defense spending market in the U.S. alone