Retail Investors Bet Big on Palantir Despite Analysts Valuation Concerns

Palantir Stock is the center of a fierce tussle between retail investors and analysts on Wall Street. After coming under immense pressure over the past few years, the data analytics software giant has exploded in recent weeks amid its increased inroads around artificial intelligence. While retail investors have bought into the company’s prospects around the technology, analysts are still skeptical.

Palantir Growing Retail Investors’ Interest

Retail investors have been building positions around the stock on growing optimism that the company is attracting tremendous demand for AI-powered tools.  Palantir is number 10 among the top stocks purchased by retail investors, ranking way ahead of Microsoft and Netflix.

The stock is already up by more than 90% from its May low, affirming the intense buying pressure in the market. The fact that the stock is still down by about 60% from its 2021 highs is another catalyst fueling the buying spree as investors look to snap it at a discount.

The company’s Chief Executive Officer, Alex Karp, reiterating that the AI tools represent an infinite market has only strengthened the investors’ resolve to strengthen their positions. Expectations that the company’s revenues will rise by about 16% this year and grow by 35% by 2026 owing to AI initiative is also driving the buying spree.

The company’s commitment to being cash positive has also helped strengthen investor sentiments. While the stock is expected to be risky and volatile amid the increased focus and scrutiny of AI innovations, many retail investors remain optimistic.

Analysts Skepticism

In contrast, analysts and fund managers remain extremely skeptical, with the stock’s consensus recommendation at 2.41 out of five, the lowest among Russell 1000 software index players. The fact that nearly half of the analysts that track the stock have a sell rating signals a cloud of concern on Wall Street.

Palantir stock is also trading 29% above its average analyst price target, which is already fueling overvaluation concerns. With the shares trading at more than 60 times their estimated earnings, the price valuation is not going well with most strategists.

For starters, Nvidia, which delivered better-than-expected financial results driven by its innovation around AI, has multiple below 50. This is despite the chip giant tripling in value this year amid strong demand for its GPUs that continue to power the AI revolution.

The skepticism comes against the backdrop of many stocks rallying on the virtue of unveiling AI tools. In recent weeks, there have been concerns as to whether any solid underlying fundamentals back the rallies and whether they are sustainable.  While Palantir has a strong focus on AI technology, it is still early to conclude that the move will significantly bolster its prospects and bottom line.

According to analysts at Goldman Sachs, artificial intelligence is just an extension of Palantir’s existing work. The fact that the technology does not represent a significant change in product strategy or is expected to enhance adoption does not warrant the premium valuation that the company enjoys by virtue of touting its AI tools.

Given that the CBOE NDX Volatility Index is down by 34%, its March peak could explain why investors are open to taking up more risks with the gauge closing at 19.3 below its 10-year average of 21.4 signals growing demand for risky appetite in the markets.