Palantir stock drops 20% in a week, amid over-valuation concerns

Shares in the artificial intelligence software maker Palantir slid more 6% on Wednesday morning.

The company's stock price has dropped around 20% over the past week, eradicating the gains made after it reported strong quarterly earnings on August 4.

The report revealed that Palantir's quarterly revenue grew nearly 50% — four times the level of 2020 — and surpassed $1 billion for the first time, surpassing Wall Street's estimates and taking the company's stock to all-time highs. Palantir has been the biggest winner of any company in the S&P 500 so far this year, its share price more than doubling.

Despite announcing a dazzling second quarter, its shares began to slip within a day, now falling for the sixth consecutive day of trading.

One explanation for this is the broader AI pullback among investors on Tuesday. Shares in chipmakers AMD, Nvidia, and Broadcom were all in the red, dragging the S&P 500 down 0.59%.

Catalyzing investor jitters was a report by The Verge on Monday that OpenAI CEO Sam Altman believes AI is in a bubble.

"When bubbles happen, smart people get overexcited about a kernel of truth,” Altman reportedly told a group of reporters last week. “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes,” he was quoted as saying.

However, Palantir's woes cannot be attributed solely to the industry-wide retreat. Some industry onlookers believe the company could be over-valued.

Palantir’s shares trade at more than 600 times earnings and about 120 times annual sales, ratios far beyond those seen in past tech booms, according to The Economist in an article published following the company's earnings report. To make those numbers plausible, revenues would need to rise more than fivefold within five years—demanding growth of over 40% annually, the piece continues.

Amplifying valuation concerns: Last Friday, Bloomberg reported that OpenAI is preparing to sell around $6 billion in Palantir stock, which would value the company at a staggering $500 billion.

It prompted analysts at Citron Research to write in a Monday note that the level of revenue growth required to justify its price-to-sales ratio is unrealistic. They say this comes down the limits of what Palantir is selling: data analytics.

"Palantir has built its reputation selling tools to mine these mountains of data, but the market is waking up: you can’t just throw more servers and code at the problem forever. Now, Palantir faces a familiar squeeze," analysts wrote.

"The days of selling “data fairy dust” are fading; it’s time for Palantir to prove it can deliver something new and tangible, not just bigger numbers," they continued.

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