Is this a major red flag for Palantir stock investors?

Palantir (NYSE: PLTR) has been on a tear in 2024, surging over 160% year-to-date. Still, there are underlying red flags, mainly centered around the software giant’s valuation, that could invalidate the bullish momentum in the future.

As of Thursday, October 24, PLTR was valued at $43.58, up 2.3% at the time of publication. Over the past month, the equity has rallied over 18%.

PLTR’s red flags 

With the growth, reality might be setting in as Palantir is facing questions about whether it can sustain its high stock price. 

The stock is trading at 40 times sales, a lofty valuation for a company still in its growth stage. This Price-to-Sales (P/S) ratio indicates that Palantir’s market value is 40 times higher than its annual revenue, a level reminiscent of the 2022 SaaS bubble, which eventually burst.

Such a high valuation suggests the stock price already factored in future growth, leaving little upside for new investors unless the company achieves exceptional growth.

Indeed, analysts have expressed concerns regarding the valuation, with some observing exhaustion in the equity’s recent price movement, as indicators such as the Relative Strength Index (RSI) signal exhaustion.

Additionally, as reported by Finbold, stock analyst Jake Ruth pointed out that Palantir’s valuation hitting above $40 is ‘very expensive’ while warning that multiple expansion can’t continue forever.’

“It’s come so fast, there’s going to be bumps along the way. <…> With such an extremely high valuation, it can fall on bad news,” said Joe Tigay, portfolio manager at Equity Armor Investments LLC.

While Palantir has enjoyed gains similar to artificial intelligence-driven companies like Nvidia (NASDAQ: NVDA), its projected growth rate of 21-24% for 2024 and 2025, though strong, falls short of the 21.4% annual revenue growth the chipmaker has achieved over five years. This disparity raises doubts about Palantir’s ability to meet lofty market expectations.

Another concern is Palantir’s limited addressable market. The U.S. commercial sector’s average revenue per customer is around $2.15 million annually, restricting its client base to the largest corporations. This could limit future growth and make it harder to justify the company’s high valuation.

Competition is also a concern, especially for Palantir’s AI Platform (AIP), which is jostling for market share with other players such as Google Cloud.

What next for PLTR stock price 

Regarding the Palantir stock outlook, the earnings report set for November 4 is one of the upcoming vital catalysts. 

To this end, investment advisor Michael Vodicka suggested in an X post on October 24 that better results will likely push PLTR to the $50 target. However, the stock will need to establish itself above $45.

Meanwhile, despite concerns regarding Palantir’s valuation, some analysts remain bullish. For instance, Wedbush’s Daniel Ives raised his target to $45 with an ‘Outperform’ rating, while Mariana Perez of Bank of America (NYSE: BAC) set a target of $50 with a ‘Buy’ recommendation.