Key Insights
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Since early 2023, the prospects surrounding artificial intelligence (AI) have driven Palantir Technologies and Nvidia’s stock prices to increase by 2,870% and 1,260%, respectively.
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Despite surpassing Wall Street’s expectations for third-quarter revenue, Palantir’s shares dropped by 8%. There are several reasons behind this decline.
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The largest publicly traded company faces challenges in justifying its valuation in its upcoming third-quarter earnings report in two weeks.
In recent years, nothing has captivated investors quite like AI. The ability for software and systems to make real-time decisions independently is transforming many industries.
The AI market is expected to reach a staggering $15.7 trillion by 2030, according to a PwC report. Companies specializing in AI, like Palantir Technologies and Nvidia, have seen substantial growth. Since the end of 2022, Palantir’s stock price has skyrocketed, while Nvidia’s has also risen significantly, contributing to a market cap that surpasses $5 trillion.
While both professional and retail investors are enthusiastic about AI’s potential, Palantir’s recent outcomes highlighted weaknesses that may unsettle Wall Street—this may become even clearer when Nvidia announces its earnings on November 19th.
Identifying Palantir’s Weakness
It’s worth noting that Palantir’s stock surge isn’t without reason. The company has a competitive edge and has consistently outperformed analysts’ sales and profit projections.
Palantir’s operational model is built around two core systems, Gotham and Foundry, with little competition in sight. Gotham, a cloud-based AI platform, is used by the U.S. military and allies for mission planning and data analysis, resulting in multi-year contracts and sustained sales growth.
In the recent quarter ending in September, Palantir reported revenue of $1.18 billion, exceeding estimates by $90 million, and projected fourth-quarter revenue to be $1.33 billion—outpacing expectations by $140 million.
However, the day after these results, Palantir’s stock fell almost 8%, erasing nearly $39 billion from its market cap.
This significant drop indicates that profits are unlikely to meet expectations that warranted such a high valuation. As of November 3rd, Palantir’s price-to-sales ratio had reached 152, far beyond the historical range for leading internet companies before the dot-com crash.
Wall Street’s analysts are known for conservatism in their forecasts, yet there seems to be no reasonable justification for Palantir’s current P/S ratio.
The Ripple Effects on Nvidia
This type of extreme valuation isn’t specific to Palantir. Nvidia, being the largest company on the stock market, faces similar scrutiny. While Nvidia boasts a competitive edge, its substantial P/S ratio raises concerns.
Nvidia’s GPUs represent more than 90% of those used in AI-powered data centers, and demand for their AI chips is significant. However, like Palantir, it’s anticipated that when Nvidia publishes its third-quarter results, even if they beat expectations, it may not justify the current high valuation.
Currently, Nvidia’s P/S ratio stands at 31, down from its peak of over 42, which is historically unsustainable.
Investors should be cautious, as history has shown that when excitement overshoots early AI adoption expectations, companies like Nvidia could face serious consequences, particularly given that about 90% of their revenue comes from the data center sector.
Moreover, Nvidia isn’t immune to competition. Many of its larger clients are now developing AI chip solutions internally, which may undercut pricing and profit margins.
Palantir’s performance has revealed Nvidia’s vulnerability—its excessive valuation could become apparent when Nvidia reports on November 19th.
Considering an Investment in Nvidia?
If you’re thinking about investing in Nvidia, there are a few things to weigh:
Currently, the analyst team at a major firm has highlighted other stocks they believe have greater potential for returns than Nvidia.
In past recommendations, stocks like Netflix and Nvidia have shown impressive growth, but now might be worth re-evaluating in light of the current market dynamics.
The insights shared here reflect perspectives and do not necessarily align with any particular institution’s viewpoints.
