The S&P 500(SNPINDEX: ^GSPC) has tumbled 4% year to date as President Trump's unorthodox trade policies have sown economic uncertainty. Companies are still spending money on artificial intelligence, but certain Wall Street recommend selling Palantir Technologies(NASDAQ: PLTR) and Upstart Holdings(NASDAQ: UPST), as detailed below:
Rishi Jaluria at RBC Capital recently set Palantir with a target price of $40 per share. That implies 64% downside from its current share price of $110.
Michael Ng at Goldman Sachs has set Upstart with a target price of $15 per share. That implies 67% downside from its current share price of $46.
Here's what investors should know about Palantir and Upstart.
Image source: Getty Images.
Palantir Technologies: 64% implied downside
Palantir develops data analytics software for the commercial and government sectors. Its core platforms (Gotham and Foundry) let customers integrate and query complex data with analytical tools and machine learning models to surface insights. Its artificial intelligence platform (AIP) adds support for large language models and natural language processing, which lets customers use generative AI to improve operational efficiency.
Management says Palantir is unique in its ability to operationalize AI, meaning it can help customers move AI capabilities from prototype to production more effectively than other vendors. Forrester Research recently corroborated that claim to some degree by ranking Palantir as the technology leader in artificial intelligence and machine learning platforms.
Palantir reported strong first-quarter financial results. Total customers climbed 39% to 769, and the average existing customer spent 124% more. Revenue rose 39% to $884 million, the seventh straight acceleration, and non-GAAP earnings increased 62% to $0.13 per diluted share. Management also raised full-year guidance, but the stock still fell sharply the next day because investors are worried about valuation.
Palantir's forward price-to-sales (PS) ratio is more than three times higher than the next closest software company, which happens to be CrowdStrike. To put that in context, Palantir's share price could plunge 70% and Palantir would still be the most expensive software stock on the market, according to Louie DiPalma at William Blair Research.
That puts investors in a tricky position. Palantir's business is firing on all cylinders and the company has a strong position in the AI platforms market, which is forecast to grow at 40% annually through 2028. Yet, the stock trades at an absurdly expensive valuation. Investors can reconcile those opposing truths by building a position slowly.
Personally, I would wait for a cheaper entry point because I think Palantir stock could fall 60% or more. But investors comfortable with that possibility can buy a very small position today if they are especially eager to own shares. Thereafter, the goal should be to purchase additional shares at progressively cheaper valuation multiples.
Upstart: 67% implied downside
Upstart provides an AI lending platform that helps banks and credit unions automate and improve credit decisions. While the FICO score has been the gold standard for decades, it usually incorporates less than two dozen data points and often fails to quantify credit risk accurately, according to Upstart. That limits credit access and forces banks to charge more for loans.
Comparatively, Upstart not only considers more than 2,500 variables, but also its machine learning models improve with each new data point. By modernizing the process, Upstart helps lenders approve more borrowers at lower interest rates. Indeed, an internal study found that Upstart AI approves twice as many applicants at an average APR 38% below traditional lending models.
Upstart reported solid financial results in the first quarter, beating expectations on the top and bottom lines. Revenue increased 67% to $2.1 billion as the number of loan originations doubled and conversion rate rose 5 percentage points. Additionally, Upstart reported positive non-GAAP earnings of $0.30 per diluted share, up from a loss of $0.31 per diluted share in the same quarter last year.
The Upstart ecosystem includes banks and credit unions that use its software to originate loans. It also includes institutional investors that purchase loans directly or as securitized products. Theoretically, demand should increase over time as the company generates more data to inform its machine learning models. But Upstart's business is also highly dependent on the economic environment.
The outlook is mixed right now. On one hand, the Federal Reserve is expected to cut rates several times this year, and lower interest rates should boost demand for credit. On the other hand, tariffs imposed by President Trump could cause a meaningful slowdown in the economy, in which case lenders would likely be more cautious about extending credit. Investors should be aware of that risk.
Upstart would struggle during a recession, and the current economic uncertainty caused the stock to crash post-earnings. However, Wall Street expects adjusted earnings to grow at 101% annually through 2026, which makes the current valuation of 69 times earnings look reasonable. Personally, I doubt Upstart will drop 67% to $15 per share. In fact, I think patient investors should buy a small position here.
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Trevor Jennewine has positions in CrowdStrike and Palantir Technologies. The Motley Fool has positions in and recommends CrowdStrike, Goldman Sachs Group, Palantir Technologies, and Upstart. The Motley Fool has a disclosure policy.
