Why Is Wall Street So Bearish on Palantir? There’s 1 Key Reason.

• Palantir Technologies is a battleground stock.

• High valuations are fueling volatility, and the stock is likely to drop significantly sometime in the next year or so.

• However, Palantir’s accelerated revenue and profit growth could pay huge dividends in the long run.

• 10 stocks we like better than Palantir Technologies ›

shares Palantir Technology (NASDAQ: PLTR) Thanks to the growing popularity of artificial intelligence (AI) and the company’s AI-centric data mining software, the software can help businesses make real-time, data-driven decisions. The stock is up 161% over the past year (as of this writing) and has gained a massive 2,160% in three years.

Yet Wall Street remains pessimistic about the stock. Of the 24 analysts who issued opinions in December, only 17% rated it a buy or strong buy. This level of pessimism is usually appropriate for underperforming companies, but Palantir’s performance has been exemplary.

One factor that largely explains Wall Street’s bearish view is the stock’s frothy valuation.

Palantir’s third-quarter earnings report was outstanding. Revenue rose 63% year over year to $1.18 billion, driving earnings per share (EPS) soaring 200%. The performance was driven by a 121% jump in Palantir’s U.S. commercial revenue, which now accounts for 34% of sales.

However, as Palantir has grown rapidly, its valuation has risen accordingly. The stock currently trades at a price-to-earnings ratio of 405 times and a price-to-sales ratio of 113 times. Even the more growth-focused price-to-earnings (PEG) ratio hits 3.4 when investors look for multiples of 1x or lower to buy undervalued stocks. By any measure, Palantir Technologies stock is significantly overvalued — at least in the short term. This could be the catalyst for a significant stock price correction of 50% (or more).

The news isn’t all bad. Wall Street expects the company’s revenue to grow 41% annually over the next five years. If that’s accurate (and using current profit margins as an example), Palantir’s revenue would grow to $24 billion, generate $9.7 million in profits, and push its market cap to $2.4 trillion.

This highlights the importance of long-term holding. It also shows that despite Wall Street’s bearishness, Palantir can still be a huge winner in the long run.

Before buying Palantir Technologies stock, consider the following factors: