The newest artificial intelligence (AI) stock in the S&P 500 is up 370% since 2023. Wall Street says avoid.

The S&P 500 (^GSPC -1.73%) measures the performance of 500 companies that meet specific eligibility requirements, including positive earnings over the past four quarters, a market capitalization of at least $18 billion, and sufficiently liquid stock. The S&P 500 is generally considered to be the best barometer for the US stock market.

Palantir Technologies (PLTR 0.56%) will join the benchmark on Monday, September 23, the date of the next quarterly rebalancing. Palantir shares have skyrocketed 370% since January 2023, essentially coinciding with the generative AI boom started by ChatGPT.

However, Wall Street analysts are less optimistic, despite Palantir’s increasingly strong position in artificial intelligence software. The stock has a 12-month median price target of $28 per share, implying a 12% downside to the current share price of $32. Here’s what investors should know.

Palantir is a recognized leader in artificial intelligence platforms

Palantir specializes in data analytics. Its platform enables companies to collect data, develop machine learning models and integrate those digital assets into an ontology. Palantir’s ontology defines the relationship between these assets and real-world objects and enables users to highlight information through analytical applications that improve decision-making. Management says its ontology-based architecture is its key differentiator.

The Palantir platform comprises several software products. Foundry is used for data processing and analysis, AIP (Artificial Intelligence Platform) enables customers to use large language models and generative artificial intelligence within Foundry, and Apollo ensures that Foundry is constantly updated across all IT environments. Palantir also offers an alternative to Foundry (called Gotham) originally designed for sensitive government data.

Forrester Research recently recognized Palantir as a leader in artificial intelligence and machine learning platforms. “Palantir is quietly becoming one of the biggest players in this market,” the analysts wrote. Palantir received the highest score for its current product offering, but three competitors — AlphabetDatabricks and C3. have — received higher scores for their product development strategy.

Palantir’s revenue growth continued to accelerate in the second quarter

Palantir reported strong financial results in the second quarter, beating both top and bottom estimates. Revenue rose 27% to $678 million, marking the fifth consecutive acceleration in sales growth. Meanwhile, non-GAAP net income rose 80% to $0.09 per diluted share.

Additionally, management drove revenue growth of 25% to 26% in the third quarter, comfortably beating the 22% growth expected by analysts. “The persistent and unbridled demand for our software, for an efficient enterprise platform that makes AI capabilities useful to large institutions, shows no signs of letting up,” CEO Alex Karp wrote in the most recent letter to shareholders.

Palantir stock is trading at an outrageous valuation

Looking ahead, Wall Street expects Palantir’s adjusted earnings to grow 22% annually through 2025. Without further context, that estimate sounds pretty good. However, Palantir stock currently trades at 100 times adjusted earnings, an outrageous multiple in context. These numbers give a PEG ratio of 4.5.

For perspective, Nvidia It currently trades at 47 times adjusted earnings, and Wall Street expects the bottom line to grow 49% annually over the next six quarters, which is the same timeframe we cited for Palantir. These numbers give a PEG ratio of just under 1.

Here’s what that means: If the market gave Palantir the same PEG multiple that Nvidia is giving it, Palantir stock would drop 30%. Personally, I would avoid the stock until it trades at a more reasonable valuation. That doesn’t mean Palantir stock will drop tomorrow. Stocks could continue to rise in the short term. But without a dramatic acceleration in earnings, I think the stock is headed for a sharp correction at some point in the future.