Shares of Tesla(NASDAQ: TSLA) have surged 75% since the presidential election. But most Wall Street analysts now believe the stock is overvalued. The median 12-month target of $275 per share implies 38% downside from the current share price of $440.
Joseph Spak at UBS is especially skeptical. He increased his price target to $226 per share in November, but kept his sell rating. He thinks the market is giving Tesla too much credit for its artificial intelligence (AI) ambitions. His outlook implies 49% downside.
Shares of Palantir Technologies (NASDAQ: PLTR) have more than quadrupled this year due to a series of strong financial results. But most Wall Street analysts now view the stock as overpriced. The median 12-month target of $39 per share implies 47% downside from the current share price of $74.
Brent Thill at Jefferies is particularly bearish. He reiterated his price target of $28 per share in November and kept a sell rating on the stock. Thill sees valuation as a serious problem for Palantir. His outlook implies 62% downside.
Here’s what investors should know about Tesla and Palantir.
Tesla reported encouraging third-quarter financial results. Revenue increased 8% to $25.1 billion on strong sales growth in the energy generation and storage segment, as well as the services segment (supercharging, insurance). Gross margin expanded 195 basis points due in part to an increase in full self-driving (FSD) sales, and non-GAAP (adjusted) earnings climbed 9% to $0.72 per diluted share.
Admittedly, revenue and earnings growth were far from spectacular, but gross profit margin hit 19.8% in the quarter, the highest level since 2022. That was encouraging because Tesla has been caught in a cycle where rising interest rates weakened demand, creating a need for price cuts that hurt profits. In fact, earnings had fallen in the previous four quarters. But interest rates are dropping and margins are expanding, which hints at better days ahead.
Additionally, CEO Elon Musk on the earnings call reiterated certain comments he made at the Cybercab event in October. Tesla plans to release an unsupervised version of its FSD software and open a ride-hailing service to the public in California and Texas next year. That would increase its addressable market. Spending on autonomous ride-hailing could hit $5 trillion by 2030, according to Statista.
However, Wall Street expects Tesla’s adjusted earnings to increase 29% in the next year. That estimate makes the current valuation of 180 times adjusted earnings look expensive, but earnings growth may accelerate in the future as Tesla earns more revenue from FSD and scales its robotaxi business. In other words, the current valuation may be less expensive in hindsight.
Personally, I doubt Tesla stock will fall 49% as Joseph Spak at UBS suggests. But I would caution investors that shares could fall sharply. The 75% gain post-election reflects the belief that Musk’s ties with President-elect Donald Trump will benefit Tesla. That may be true, but the stock will likely be volatile without tangible proof. Shareholders uncomfortable with that should consider trimming their positions.
Palantir reported impressive financial results in the third quarter. Its customer count rose 39% to 629, and the average existing customer spent an additional 18%. In turn, revenue increased 30% to $725 million, the fifth straight sequential acceleration. Meanwhile, non-GAAP earnings increased 43% to $0.10 per diluted share. Management also raised its guidance, such that full-year revenue is now forecast to increase 26% in 2024.
Demand for Palantir’s AIP product (its new artificial intelligence platform) was an instrumental growth driver in the quarter. AIP enhances its core data analytics platforms, Gotham and Foundry, with support for generative AI. “The release of our newest platform, AIP, has transformed our business,” CEO Alex Karp wrote in his letter to shareholders.
Forrester Research analysts recently ranked Palantir as a leader in artificial intelligence and machine learning platforms software. That bodes well for the company. Spending on AI platforms is forecast to increase at 51% annually through 2028. “AI platforms will be the fastest growing technology in the years to come,” according to Andrea Minonne, research manager at the International Data Corporation (IDC).
However, Palantir has a serious valuation problem. Wall Street expects adjusted earnings to grow 31% in the next year. That consensus estimate makes the current valuation of 210 times adjusted earnings look absurdly expensive. The share price appreciation witnessed this year has primarily been driven by multiple expansion, not earnings growth. That is unsustainable.
I doubt Palantir shares will plunge 62% as Brent Thill at Jefferies suggests. But shareholders with big positions should consider selling some (or even all) of their shares. Palantir is undoubtedly executing on a massive opportunity, but not even the best business is worth buying at any price. In this case, the valuation is utterly disconnected from business fundamentals.
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Trevor Jennewine has positions in Palantir Technologies and Tesla. The Motley Fool has positions in and recommends Jefferies Financial Group, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
