1 popular artificial intelligence (AI) stock that Wall Street says is selling now

Using Wall Street analyst price targets to determine whether a stock is a buy or sell is not the best strategy. While it should help inform investors about how others feel about the stock, it shouldn’t be the most important thing. A popular artificial intelligence (AI) stock that these analysts (on average) say they are selling now is Palantir (NYSE: PLTR).

According to an average of 15 analysts, the average price target for Palantir stock is $27.08, indicating a downside of nearly 30%. So should investors heed their advice and sell Palantir stock?

Palantir’s AI services have never been more popular

Palantir has become a popular investment in AI because of its expertise in this field. However, Palantir has not decided to offer an AI solution for the past two years because it is popular. Instead, it built its entire software stack around artificial intelligence from the ground up, giving it a leg up on many competitors in the space.

Palantir started as a company that made AI software for the government. The basic idea was to take data streams and provide real-time information, equipping users with the most up-to-date information possible. After management saw a strong use case for its software outside of government, it expanded to the commercial side. From the latest results, government customers are still the largest customers, accounting for 55% of revenue.

However, Palantir’s latest rise has been due to huge demand for its Artificial Intelligence Platform (AIP) product. AIP enables the integration of AI into a business, rather than using a generative AI model in parallel. By integrating AI into workflows, companies can control how they want AI to be used within their operations. This is a key step forward in AI integration and has become extremely popular, especially among the US commercial customer base.

In the company’s second quarter (ended June 30), US commercial revenue rose 55% year-over-year to $159 million. Although this represents only 24% of total revenue, it is the fastest growing business segment. The number of US customers also exploded, growing 83% year-over-year to 295 customers. That low number may lead some investors to believe that Palantir has a much bigger opportunity ahead, as other software-as-a-service companies often list their customer base in the thousands.

However, if you annualize Q2 revenue and divide it by the number of customers, you get an average revenue per US customer of $2.16 million. Few companies can afford more than $2 million a year for a software package, so that limits the size of customers Palantir can sign up.

Still, that hasn’t stopped Palantir from succeeding as a company. In Q2, revenue rose 27% to $678 million, while posting a profit margin of nearly 20%.

However, the market gave the stock an incredible price, which caused its value to rise.

It will take years for Palantir’s valuation to make sense

If you look at Palantir’s stock price, you might be tempted to think it’s “cheap” since it’s only around $40. However, when you look at the company’s valuation, it has become absurd.

Palantir trades at over 36 times sales. The last time it traded this high, it didn’t end well for the stock. Additionally, a good rule of thumb when using the price-to-sales (P/S) ratio is to avoid stocks that are trading above their growth rate.

Let’s say Palantir can achieve a 30% profit margin and grow its revenue by 30% over the next five years to give you an idea of ​​how expensive that price is. If it does, it would be valued at 31 times earnings, a historically expensive price to pay for a stock. Note that the assessment would only be carried out if the share price has not moved for five years.

So Palantir’s growth rate needs to accelerate to a higher level than it already is and keep it up for an unbelievable five years just to get to a normal rating point.

This shows how expensive Palantir stock is, and it’s no wonder Wall Street is saying sell the stock.

Palantir’s business may be excelling, but the stock has reached a point where its valuation no longer makes sense. As a result, I think the stock is a sell, but at the very least investors should avoid buying the stock until the valuation returns to more reasonable levels.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

1 Popular Artificial Intelligence (AI) Stocks Wall Street Says They’re Selling Now was originally published by The Motley Fool