Palantir Technologies Inc. (NASDAQ: PLTR) has become one of the hottest stocks of 2024, with gains in excess of 185% over the past year, thanks in large part to the rapid expansion of its AI-based and on-demand platforms growing number of data analysis solutions.

However, as Palantir prepares to report its third-quarter results on November 4, the company’s high valuation and reliance on continued momentum in the AI ​​sector calls for a cautious approach from investors.

Although Palantir has consistently reported strong growth numbers, including 27% year-over-year revenue. increase in the second quarter and an impressive gross profit margin of 81%, surpassing even that of Nvidia (NASDAQ: NVDA) 75%, its current valuation poses challenges that should not be overlooked.

Key fundamentals and partnerships that drive momentum

The key to Palantir’s growth is its business-oriented AI platforms, including Foundry and the Artificial Intelligence Platform (AIP), which saw substantial growth of 55% in 2017. United States business income last quarter.

Some of Palantir’s recent stock momentum can also be attributed to its addition to the S&P 500 indexas well as a series of strategic partnerships and major contracts won.

Notably, Palantir has partnered with Edgescale AI to launch Live Edge, a platform that combines Palantir’s Edge AI capabilities with Edgescale AI’s infrastructure technology to support AI applications in the healthcare industries. manufacturing and utilities.

Separately, Palantir secured a $99.8 million military AI contract from military research lab DEVCOM, underscoring its appeal in the defense sector.

Furthermore, the company recently teamed up working with L3Harris (NYSE: LHX), a leading defense contractor, to develop AI-enhanced solutions for the national security operations of the United States and its allies.

These deals and collaborations are key to fueling Palantir’s growth, although concerns about its high valuation have led some analysts to take a more cautious stance.

High valuation signals caution

This collaboration contributed to Palantir’s higher annual guidance, which the company has revised upwards twice this year.

In the second quarter, Palantir forecast 2024 revenue of between $2.742 billion and $2.750 billion, up from previous guidance of $2.677 billion to $2.689 billion. This strong performance has boosted investor confidence, but Palantir’s report high valuation multiples remain a major concern.

Trading at approximately 33 times forward sales and 113 times forward earnings, the stock is aggressively valued, reflecting high growth expectations.

Additionally, a PEG ratio of 4.62 suggests overvaluation relative to growth potential, while a low free cash flow yield of 0.69% and earnings yield of 0.40% indicate immediate returns. limited for investors.

Additionally, a short interest rate of 4.36% highlights market skepticism, signaling that some investors are betting against Palantir’s ability to maintain its current valuation levels.

Given these stretched multiples, it’s unclear whether Palantir can sustain its rally by simply hitting its quarterly targets.

As Palantir’s third-quarter results approach, investors will likely focus on whether the company will raise its full-year guidance again, as a standard profit may not be enough to satisfy market expectations.

Stock market analyst Jake Ruth also has note that Palantir’s valuation above $40 is “very expensive”, warning that such multiple expansion cannot continue indefinitely.

“Multiple expansion cannot continue forever” –Jake Ruth.

At the close of the last trading session, Palantir stock was trading at $44.86, up almost 3% for the day. As stocks approach the $45 mark, investors remain optimistic and are considers $50 as potential target by the end of 2024.

Limited addressable market and growing competition

Despite Palantir’s growing footprint, its high average revenue per commercial customer in the United States of approximately $2.15 million per year suggests a limited addressable market, primarily focused on large enterprises with needs important in data.

This narrow focus could hinder broader market expansion, especially as Palantir faces growing competition from major players like Google Cloud, which also offers AI-driven data solutions tailored to large enterprises.

Adding to these concerns, recent initiate sales raised red flags. While insider selling doesn’t always indicate a bearish outlook, these large transactions by top executives may suggest doubts about the company’s ability to sustain its current rally.

While Palantir continues to be a compelling growth model, investors would do well to approach it with a balance of optimism and caution, ensuring that the company’s fundamentals align with its ambitious valuation.