Palantir Technologies Inc. (NASDAQ: PLTR) has emerged as one of 2024’s standout stocks, with gains of over 185% over the past year, driven largely by the rapid expansion of its AI-powered platforms and increasing demand for data analytics solutions.

But as Palantir prepares to release its third-quarter results on Nov. 4, the company’s elevated valuation and reliance on continued momentum in the AI ​​sector calls for a cautious approach from investors.

Although Palantir has consistently reported strong growth numbers, including a 27% year-over-year increase in revenue increase during Q2 and an impressive gross profit margin of 81%, surpass also Nvidia’s (NASDAQ: NVDA) 75%, its current valuation presents challenges that should not be overlooked.

Important foundations and partnerships drive momentum

Key to Palantir’s growth has been its commercially focused AI platforms, particularly Foundry and the Artificial Intelligence Platform (AIP), which saw significant growth of 55% in commercial revenue in the United States last quarter.

Some of Palantir’s recent stock momentum can also be attributed to it addition to the S&P 500 indexalong with a series of strategic partnerships and significant contract wins.

Palantir partnered with Edgescale AI to launch Live Edge, a platform that combines Palantir’s Edge AI capabilities with Edgescale AI’s infrastructure technology to support AI applications in manufacturing and utilities.

In addition, Palantir secured a $99.8 million military AI contract from the DEVCOM Army Research Laboratory, underscoring its attractiveness in the defense sector.

In addition, the company recently merged up with L3Harris (NYSE: LHX), a leading defense contractor, to develop AI-enhanced solutions for US and allied national security operations.

Those contracts and collaborations are critical to fueling Palantir’s growth, although concerns about its lofty valuation have prompted some analysts to take a more cautious stance.

High valuation signals caution

The collaboration has contributed to Palantir’s rising annual guidance, which the company has revised up twice this year.

As of the second quarter, Palantir projected 2024 revenue of between $2.742 billion and $2.750 billion, up from previous forecasts of $2.677 billion to $2.689 billion. This robust performance has boosted investor sentiment, but Palantir’s high valuation multiples are still a big problem.

Trading at around 33 times forward sales and 113 times forward earnings, the stock is priced aggressively, reflecting elevated growth expectations.

Additionally, a PEG ratio of 4.62 suggests overvaluation relative to growth potential, while a low free cash flow yield of 0.69% and a yield of 0.40% indicate limited immediate returns for investors.

Additionally, short interest of 4.36% shows market skepticism, signaling that some investors are betting against Palantir’s ability to sustain its current valuation levels.

Given these stretched multiples, it’s uncertain whether Palantir can maintain its rally by simply meeting quarterly targets.

When Palantir’s third-quarter earnings strategy is set, investor focus will shift to whether the company raises its full-year guidance once again, as a standard result may not be enough to satisfy market expectations.

Stock analyst Jake Ruth also have noted that Palantir’s valuation above $40 is “very expensiveand warns that such multiple expansion cannot continue indefinitely.

“Multiple expansion cannot go on forever,”-Jake Ruth.

At the end of the most recent trading session, Palantir’s stock was priced at $44.86, up nearly 3% for the day. With shares approaching $45, investors remain optimistic and are sees $50 as a potential target at the end of 2024.

Limited addressable market and increasing competition

Despite Palantir’s growing footprint, its high average revenue per US commercial customer, about $2.15 million annually, suggests a limited addressable market focused primarily on large enterprises with significant data needs.

This narrow focus could hinder broader market expansion, especially as Palantir faces increasing competition from big players like Google Cloud, which also offer AI-powered data solutions tailored for large enterprises.

In addition to these concerns, latest insider sales have given warning signs. While insider selling doesn’t always indicate a bearish outlook, these big transactions by top executives can hint at doubts about the company’s ability to sustain its current rally

While Palantir continues to be a compelling growth story, investors would do well to approach it with a balance of optimism and caution, to ensure the company’s fundamentals are consistent with its ambitious valuation.