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One of the more impressive winners in this year’s AI-driven rally has been Palantir Technologies (NYSE:PLTR). Palantir stock has surged nearly 140% since the beginning of the year on the back of impressive earnings and even more impressive expectations upgrades.
Of course, most investors know that the launch of ChatGPT in November 2022 sparked a rise in AI stocks. On many earnings calls, companies would squeeze in mentions of their work on artificial intelligence.
AI mentions in Q1 2023 earnings calls surged 64% year-over-year, as companies sought to reinvent themselves as AI plays.
For Palantir, a company in the big data and AI space for years, little reinventing was needed. This certainly helped the company’s stock price surge to the degree it has this year. That said, Palantir stock remains more than 50% below its all-time high, and I think more downside could be on the horizon.
Here’s why I think PLTR stock is one AI darling investors should avoid, or at least be cautious with, right now.
Earnings Are Unstable
Palantir recently announced its third consecutive profitable quarter with a Q2 net income of $28M ($0.01/share). That sounds good on its face, and it is.
However, the company’s nominal earnings per share value approximates zero, which isn’t great, considering Palantir has a history of prioritizing growth over profitability, which has led to investor concerns in the past.
Palantir saw a 13% year-over-year revenue increase. That’s great. However, its costs are rising at the same pace, leaving margins unchanged.
Despite landing many government contracts, expected to be profitable, the company isn’t generating significant cash flow.
Some analysts, like Wedbush’s Dan Ives, remain optimistic, raising their price target on Palantir stock by 15%. However, achieving success at a valuation of 16-times revenue is challenging.
While Palantir’s cloud software and AI platform are garnering attention, the company hasn’t provided new guidance. Though its customer base grew by 38%, this is a slowdown from the nearly 50% growth seen in 2021.
The stock previously rose from $4.30 to $20 because of speculation about the company’s potential to profit from AI. Despite this being a clear growth trigger, doubts remain about Palantir’s capability to leverage this growth trend.
Wedbush’s Dan Ives’ upbeat call led to a 15% stock uptick. However, with a valuation at 16 times sales and an unclear balance between hype and real growth, Palantir’s stock could bear substantial risk without faster revenue growth.
Regulatory Issues and Palantir Stock
Palantir’s strong market standing and pedigree might attract investors, yet broader concerns could cause hesitation. Richard Gardner, CEO of Modulus, pointed to the ongoing regulatory changes within the AI industry as a significant factor to monitor.
The future of AI software developers is unpredictable because of ongoing advancements in AI and machine learning, and potential regulatory changes. As Richard Gardner notes, upcoming regulations could significantly affect companies.
Despite a convincing performance earlier this year, Palantir’s stock may face hurdles due to forward-looking guidance and profit-taking. Until the firm shows consistent cash flow generation, it remains a speculative stock best observed from the sidelines.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.