AI has been the market’s main theme over the past year and a half or so, and investors have wanted a piece of the action. Stocks affiliated with the trend have benefited immensely and have been some of the market’s biggest winners.
However, Monness’ Brian White, an analyst ranked in the top 1% of Street stock experts, thinks that is all about to come to an end.
“On the back of a dismal earnings season for enterprise software and the failure of this 18-month gen AI propaganda cycle to deliver more than de minimis revenue for most companies in the industry, we believe the market will increasingly shun software stocks with excessive valuations,” said the 5-star analyst.
And one name you can definitely put in that group, according to White, is Palantir (NYSE:PLTR).
Palantir shares soared by 167% in 2023, already making the valuation rich enough, and since then the stock has gained another 41%. Based on White’s estimates, Palantir claims the richest valuation in the enterprise software group, while at the same time it claims the top spot across the analyst’s entire coverage. Now, its valuation has reached a “gluttonous extreme.”
Accordingly, White has now downgraded his PLTR rating from Neutral to Sell, and has set a price target of $20, suggesting the shares will shed 16% of their value over the coming year. (To watch White’s track record, click here)
While Palantir might be the most extreme case of a software stock with a valuation out of whack, White’s dim view extends to other names, with the analyst noting the March quarter, April quarter, and May quarter numbers from “the enterprise software complex were largely downbeat.”
Sharp selloffs were inflicted on prominent SaaS names such as Salesforce and Workday after their outlooks disappointed. And while shares of Oracle surged post-earnings on the back of “AI fervor, high-profile partnerships, and accelerating RPO growth, largely driven by LLM training projects,” White points out its FQ4 revenue missed Street expectations and the FQ1 outlook “proved uninspiring.”
“Aside from a perilous macro environment and shifting spending priorities,” White summed up, “the gen AI nirvana propagated by the enterprise software industry has proven to be a revenue illusion this year.”
Amongst White’s colleagues, 3 others join him in the PLTR bear camp, and with the addition of 3 Buys and 6 Holds, the stock claims a Hold consensus rating. The average target currently stands at $22.55, indicating shares will tumble ~7% from current levels. (See Palantir stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.