Palantir Shares Keep Rising, But Have They Peaked?

Palantir Technologies (PLTR -4.88%) is a popular stock among retail investors, and there have been several catalysts that have helped it reach new highs this year. The company has achieved strong results and the inclusion of the stock in the S&P500 has given investors more reason to invest in it than before. Since the beginning of the year, shares of the data analytics company are up 160%.

The stock shows no signs of slowing down, with a market cap now around $100 billion. Is now a good time to jump on the Palantir bandwagon, or should you brace yourself for a possible correction?

Palantir has exceeded analyst price targets

According to data from Yahoo! Financially, the average analyst price target for Palantir is $28.85. But as of Wednesday, the stock closed at just under $45 – or 56% higher than the average.

Analyst price targets can and will change, especially after a company reports earnings numbers and provides updated guidance. As the company performs better, upgrades can follow. But they can also quickly turn the other way if the company’s results disappoint.

Nevertheless, analyst price targets can be a useful guide in gauging how much optimism and hype is behind a stock. And with Palantir, that’s clearly a lot, given the stock’s high valuation — not just compared to analyst price targets, but also based on many popular valuation metrics. Currently the tech stocks trades on the following multiples:

• 264 times earnings.
• 43 times turnover.
• 25 times book value.

Valuations have clearly taken a back seat when it comes to Palantir’s stock, implying strong conviction and interest from retail investors, who have shown in the past (e.g. with meme stocks) that they are willing to accept high and blatant valuations pay for companies they like.

A good company, but perhaps not good enough to justify such a high valuation

Palantir’s business has improved significantly over the years and with the rollout of its Artificial Intelligence Platform (AIP), which has unlocked new growth opportunities. In its latest earnings report, for the period ending in June, revenue grew 27% year-over-year to $678 million. The improvement in operating income was even more significant, from $28.1 million a year ago to more than $134.1 million this past quarter.

The company would need to continue growing its earnings at a rapid pace to make its valuation appear more reasonable. But with management expecting only 3% quarter-on-quarter revenue growth for the current period, that doesn’t seem likely. While the company is growing faster than in the past, the premiums at which its shares trade are simply too high to argue that Palantir isn’t massively overvalued.

Should You Buy Palantir Stock?

There’s a lot of excitement and bullishness in the market these days, and I think that’s at least part of the reason why Palantir stock is as high as it is today. Unfortunately, the shares have already risen to one blatant appreciationit is difficult to predict how high it will end, as retail investors have proven that they can take stocks to extremely high prices, even when the underlying fundamentals may not justify such enthusiasm.

I don’t think the stock has peaked, at least not until there is a bearish reason for investors to sour on it, such as an earnings miss or uninspiring guidance. Until that happens, I wouldn’t be surprised if the stock continues to rise, even if the valuation could prove unsustainable in the long term.

Due to the volatility and extremely high valuation that Palantir is trading at, this is not an investment I would put in my portfolio; the risk of a steep correction is always lurking. This is a stock that appears to be perfectly priced.