Nearly Every Wall Street Analyst Expects Palantir Stock to Decline -- Are They Right?

For the better part of the last two-plus years, the bulls have been in control on Wall Street. The mature stock-fueled Dow Jones Industrial Average, broad-based S&P 500, and growth-focused Nasdaq Composite have all reached numerous record-closing highs.

Though the return of Donald Trump to the White House has lit a fire under Wall Street in recent months -- the Dow Jones, S&P 500, and Nasdaq skyrocketed by 57%, 70%, and 142%, respectively, during his first term -- there's little question that the stock market's biggest catalyst has been the evolution of artificial intelligence (AI).

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Artificial intelligence empowers software and systems to reason, act, and evolve, all without the need for human intervention. It's a technology that offers use cases in all sectors and most industries around the world and can, per PwC in Sizing the Prize, increase global gross domestic product by 26% come 2030.

While semiconductor colossus Nvidia has been the face of the AI revolution, it's ceded its pedestal as the hottest AI stock on the planet to data-mining specialist Palantir Technologies (NASDAQ: PLTR). Since the start of 2023, shares of Palantir have increased by more than 1,700%. What's more, Palantir finds itself as one of the 10 most-valuable tech stocks ($266 billion market cap, as of the closing bell on Feb. 10) on U.S. stock exchanges.

Although Palantir's ascent has been nothing short of awe-inspiring, Wall Street's consensus foreshadows trouble to come for the hottest AI stock on the planet.

Palantir's moat has allowed it blow past all but one Wall Street price target

The fuel that's powered Palantir's otherworldly stock increase is its seemingly impenetrable moat. No other company is particularly close to competing with the software-as-a-service solutions Palantir can offer at scale.

Palantir's breadwinner has long been its AI-inspired Gotham operating platform. Gotham is used by federal governments as a way to gather copious amounts of data, along with plan and execute missions for the military. The contracts Gotham earns usually last for four or five years, which has led to highly predictable operating cash flow and recurring profitability.

To build on this point, Gotham is ideally positioned to benefit from President Donald Trump's America-first philosophy. The Trump administration aims to protect domestic AI intellectual property, which more than likely will lead to additional contract wins for Palantir over the coming four years.

Investors are also excited about the long-term potential of Foundry -- Palantir's machine learning-powered platform that helps businesses make sense of their data. Foundry is still in its very early stages of expansion and should help Palantir easily sustain a double-digit sales growth rate.

This combination of irreplaceability, profitability, and ideal positioning under the Trump administration, helped to make Palantir Technologies the hottest AI stock.

Yet, as of the closing bell on Feb. 10, only one Wall Street analysts' price target -- $125 per share from Bank of America Securities analyst Mariana Perez Mora -- remains above Palantir's share price of $116.65. In other words, nearly every Wall Street analyst who's issued a price target on Palantir expects its stock to decline.

Image source: Getty Images.

Is Wall Street wrong about Palantir? History weighs in.

The all-important question investors have to ask is: Can Palantir prove an overwhelming majority of analysts, who tend to be reactive rather than proactive with their price targets, wrong? To answer this question, let's allow history to be our guide.

Parabolic moves higher are nothing new for the market-leading businesses ushering in game-changing technologies on Wall Street. For the last three decades, companies on the cutting edge of the hottest trends, including the advent of the internet, genome decoding, 3D printing, blockchain technology, the metaverse, and artificial intelligence, have all soared.

However, one consistency with next-big-thing innovations is that professional and everyday investors overestimate early adoption rate and utility. For 30 years, every hyped next-big-thing has eventually given way to a bubble-bursting event. In short, history would suggest that AI is simply the next in a long line of potentially game-changing technologies that will need more time to mature than is being given by investors.

If an AI bubble were to form and burst, Palantir would be somewhat insulated due to the multiyear contracts it's signed with the U.S. government. Nevertheless, bubble-bursting events are often driven by emotion, which would almost certainly be bad news for Palantir stock.

PLTR PS Ratio data by YCharts. Note: Palantir's price-to-sales (P/S) ratio is based on trailing-12-month sales as of Sept. 30 in this chart.

The far bigger worry for Palantir, based on what history tells us, is its extremely extended valuation. Though its seemingly impenetrable moat is worthy of a premium valuation, its stock closed out Feb. 10 at a staggering price-to-sales (P/S) ratio of 93, based on full-year sales in 2024.

To put into context just how far out of the norm this is, Amazon and Cisco Systems peaked at respective P/S ratios of around 40 prior to the dot-com bubble bursting. Meanwhile, Nvidia's P/S ratio topped out above 42 last summer. Most businesses on the leading edge of a game-changing technology fizzle out in a P/S range of 30 to 40. Palantir has more than doubled this range and is approaching a virtually unheard-of triple-digit P/S ratio.

While Palantir stock has been able to buck Wall Street's prognostications thus far, history paints a pretty clear picture that its parabolic climb won't be sustainable.

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Bank of America is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon and Bank of America. The Motley Fool has positions in and recommends Amazon, Bank of America, Cisco Systems, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.