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Palantir (PLTR) stock dropped 6% on Monday after Morgan Stanley analyst Sanjit Singh initiated coverage with an Underweight rating.

While Singh recognized Palantir as a “top partner” in fast-moving AI projects and praised its “strong execution and momentum,” he raised concerns about the stock’s overvaluation.

Singh set a price target of $60 per share, suggesting a potential downside of approximately 25%.

This marks a shift for the AI-focused data analytics company, which saw a remarkable surge in 2024, with its stock soaring 340% and its market capitalization exceeding $150 billion.

Palantir was the top performer in the S&P 500 in 2024, even outpacing Nvidia.

However, in the new year, its stock has declined 1.01% year-to-date, while the S&P 500 has gained 1.29%.

Despite acknowledging Palantir’s leadership in the generative AI space, Singh expressed concerns about its valuation, arguing that the company’s premium pricing is more a result of market hype than sustained, fundamental growth.

PLTR growth: reasons

Palantir has been at the forefront of the generative AI revolution, leveraging its Artificial Intelligence Platform (AIP) to drive significant revenue growth.

“In this early stage of the AI era, Palantir has gotten a lot of things right,” Singh wrote, conceding that the bank had “underappreciated several factors” when downgrading the stock to Underweight from Equal Weight in August 2023.

The company’s US Commercial segment grew nearly 50% year-over-year in fiscal 2024, up from 36% in 2023, fuelled by its enterprise “boot camps” and AI-driven solutions.

The company’s government segment has also been a key driver of success, highlighted by a $619 million extension of its Army Vantage contract with the US military.

In its most recent quarter, Palantir reported $499 million in US revenue, tripling from $343 million in the same period last year.

Its commercial ventures added another $179 million, showcasing its ability to diversify revenue streams.

“While acknowledging strong execution and momentum, we see success more than priced in at the current multiple premium,” Singh wrote, adding that “business momentum now seems to be stabilizing.”

Concerns over PLTR valuation 

While Palantir’s operational success is evident, Singh argues that its current valuation leaves little room for near-term upside. He said,

Palantir has evolved as a top partner for quick AI implementation, but the trading levels of the company are considerably higher than the company’s intrinsic value.

He emphasized that much of the company’s future growth potential is already reflected in its stock price, making it challenging to justify its current multiple premium.

Analysts split on Palantir’s trajectory

The downgrade has intensified the debate surrounding Palantir’s outlook.

Bullish analysts, such as Wedbush’s Dan Ives, highlight the company’s first-mover advantage in AI and its ability to capitalize on long-term trends.

Meanwhile, skeptics like Singh argue that the hype surrounding generative AI has led to an overvaluation that may not be sustainable, especially as growth moderates.

Singh is not alone.

RBC Capital Markets’ Rishi Jaluria has a starkly lower target price of $11 for Palantir.

His valuation is based on an enterprise value-to-revenue multiple of seven times his forecast for the company’s 2025 revenue, a sharp contrast to its current multiple of 33 times.

Jaluria views Palantir’s risk-reward profile as “skewing unfavorable.”

In his latest research note, he pointed out that the company’s recent earnings strength was heavily driven by government contracts, influenced by the timing of specific deals, while growth in its commercial segment has slowed.

The inclusion of Palantir in the S&P 500 further amplified investor enthusiasm in 2024, but the stock’s recent dip reflects growing concerns over whether the company can maintain its growth trajectory in a maturing AI market.

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