Investing.com -- Palantir (NYSE:PLTR) stock has been downgraded from Hold to Underperform at Jefferies as the firm cites concerns over the company's high valuation following the latest rally.
The price target was also reduced to $28, which is based on 19 times the estimated 2025 revenue, which is significantly higher than the large-cap average of 12 times revenue.
Analysts note that PLTR is now "the most expensive software name."
The downgrade comes despite acknowledging that Palantir's fundamentals are intact, with the company having shown four quarters of accelerating growth.
Jefferies recognized Palantir's ability to deliver 30% year-over-year revenue growth and a 59% increase in Remaining Performance Obligations (RPO), which measures future revenue that is under contract but not yet recognized. However, the investment bank expressed skepticism about the company's ability to maintain such a high growth rate moving forward.
Jefferies highlighted that Palantir's year-to-date outperformance has been mainly driven by an expansion in its next twelve months (NTM) revenue multiple, which has increased by 176% year-to-date, making it the only stock with triple-digit multiple expansion. This contrasts with a 9% increase in CY25 revenue estimates for the same period.
The report also noted a rise in insider selling through 10b5-1 plans, with Palantir's CEO having sold more than $1.2 billion of stock in the past three months, representing approximately 14% of his stake.
Jefferies expressed concern that the high percentage of shares held by retail investors could lead to quick and significant multiple compression if the stock were to lose appeal.
"~50% of PLTR's shares outstanding are held by retail investors," analysts highlight.
"This shareholder structure is a double-edged sword in that while a bigger retail base could further fuel multiple expansion on no news/change to fundamentals, these dynamics could also cause very quick and significant multiple compression should the stock go out of favor."
Jefferies concluded that for Palantir to grow into its current multiple and maintain its stock price, it would need to accelerate growth to 40% over the next four years and trade at 12 times its estimated 2028 revenue. The firm views this scenario as unlikely, suggesting that there could be limited upside for the stock based on these projections.
Palantir shares surged more than 30% across the last five trading sessions, driven by a strong earnings report.