With the major equity indices trading near all-time highs, quite a few companies across various sectors are now priced at lofty valuations. Two popular stocks on Wall Street that fit this description are Tesla (TSLA) and Palantir (PLTR), which analysts believe are significantly overvalued at current levels. Let’s see why.
Is Tesla Stock Overvalued Right Now?
With a market cap of $810.7 billion, Tesla (TSLA) is the largest automobile company in the world. While shares of the electric vehicle (EV) maker are down 38.6% from all-time highs, they have more than doubled since the start of 2023.
However, in the last three years, Tesla has been wrestling with falling profit margins and narrowing cash flows. Since 2022, Tesla has been forced to lower its vehicle prices several times to offset sluggish consumer demand in the face of headwinds such as inflation and elevated interest rates.
In the last two quarters, Tesla has reported a free cash outflow of $1.19 billion, compared to its record cash flow of $7.5 billion in 2021. In the last 12 months, Tesla’s gross margins have fallen to 17.7% from 25.6% in 2022. Its operating margin has fallen from 16.8% to 7.5% in this period.
Analysts maintain a “hold” rating on the shares. Out of the 36 analysts tracking Tesla stock, 10 recommend “strong buy,” one recommends “moderate buy,” 18 suggest a “hold,” and seven recommend “strong sell.” The average target price for TSLA stock is $201.60, about 21.7% lower than the current trading price.
So, why are investors bullish on Tesla?
The critical near-term driver for TSLA stock is the upcoming robotaxi event scheduled for next month, where CEO Elon Musk is expected to showcase Tesla's self-driving capabilities, allowing the EV maker to enter the autonomous driving and ride-hailing market and gain a first-mover advantage. According to Musk, the ride-hailing market will represent a multi-billion-dollar opportunity, allowing Tesla to diversify its revenue stream. However, Musk has been promising a full self-driving car since 2017, and has yet to deliver on his lofty goals.
Tesla will also soon report vehicle delivery numbers for Q3, a closely watched metric on Wall Street. In the first six months of 2024, Tesla reported a decline in vehicle deliveries year over year. However, Barclays expects the EV giant to report 470,000 vehicle deliveries in Q3, an increase of 8% year over year.
Tesla will likely need to impress with its robotaxi launch, as well as improve profit margins and vehicle shipments amid competition from new and legacy automobile players, to regain Wall Street's confidence.
What's the Forecast for PLTR Stock?
Since the start of 2023, Palantir Technologies (PLTR) has surged a remarkable 500%, valuing the entity at a market cap of $82.6 billion. Palantir first began as a company that builds and deploys software platforms for companies that assist in counterterrorism investigations and related operations. Its Gotham platform allows users to identify patterns hidden within datasets, while the Palantir Foundry transforms the way companies operate by creating a central operating system for their data.
One key reason behind the steep rise in PLTR stock is increasing demand for its artificial intelligence platform (AIP) product. The AIP enables AI integration across business verticals, and this integration into workflows allows clients to control the use of AI at an operational level.
Initially, Palantir banked on government contracts to drive revenue growth. However, in Q2 of 2024, Palantir increased commercial sales by 55% year over year to $159 million, while its commercial customer count rose by 83% to 295. Total sales rose by 27% to $678 million, while its profit margin was almost 20%.
Palantir is forecast to grow its sales from $2.23 billion in 2023 to $2.76 billion in 2024, with continued growth to $3.33 billion in 2025. Adjusted earnings per share (EPS) are estimated to expand from $0.25 in 2023 to $0.43 in 2025. So, priced at 25x forward sales and 86x forward earnings, PLTR stock is very expensive.
That steep valuation is a key reason why many analysts remain skeptical of PLTR, which now has a consensus rating of “moderate sell” - newly downgraded from “hold." Out of the 15 analysts covering PLTR stock, two recommend “strong buy,” six back a “hold,” one suggests a “moderate sell,” and six call it a “strong sell.”
The average target price for Palantir stock is $25.40, indicating expected downside of 32.1% from current prices.
