Investors Fear Palantir Stock Drop May Signal Broader AI Valuation Concerns

Palantir was an analytics software and defense/security wunderkind even before the AI boom. The emergence of that tech phenomenon only supercharged its appeal. The company's third quarter results and full year guidance were nothing short of astounding, even by the current era's exceptional standards. 

So it was with some trepidation that investors and analysts then watched its stock drop 7% in one day - yesterday - on growing concerns that, despite its performance - the company had become emblematic of broader AI overvaluation issues. Goldman, Morgan, the Federal Reserve, the Bank of England and the IMF have all now elevated those concerns to a significant economic policy threat. The big banking and investing firms are now talking about a 10-20% equity market correction which, given the dependence of GDP on related investments, could cause an economic downturn. For VCs and other investors, the question is becoming, if not existential, then portentous. JL

Catharine Baab and Alex Daniel report in Quartz:

The selloff in Palantir and the Nasdaq, set to open down 1.3%, highlights a tense dynamic: America’s stock market has arguably become a leveraged bet on AI. Palantir blew past Wall Street expectations in its third quarter, raising its full-year guidance and touting triple-digit growth in its U.S. business. Still, the retail-investor and Wall Street darling fell over 7% before the bell on Tuesday, in line with a broader Nasdaq slide. Equities have soared this year as investors piled into AI stocks (but) the heads of Goldman Sachs, Morgan Stanley think global markets are nearing a 10%-20% correction after the highs of recent months. The boss of Capital Group, which manages $3 trillion, said valuations are “challenging.” The Federal Reserve Chair and Bank of England Governor (also) raised concerns that stocks are overvalued

The heads of Goldman Sachs, Morgan Stanley and other Wall Street giants think global markets are nearing a comedown after the highs of recent months. 

Palantir blew past Wall Street expectations in its third quarter — raising its full-year guidance and touting triple-digit growth in its U.S. commercial business. Still, the retail-investor and Wall Street darling fell over 7% before the bell on Tuesday, in line with a broader Nasdaq slide. 

Dan Ives of Wedbush credited a “this is as good as it gets” reaction to results as the reason for the pullback. In a larger sense, as the Wall Street Journal noted, “A note of caution is creeping into markets.” Ted Pick, CEO of Morgan Stanley, speaking early Tuesday in Hong Kong, posited that the months-long run-up in major indexes could be making stocks vulnerable—if enthusiasm lapses, there’s nowhere to go but down. 

Equities have soared this year as investors piled into artificial intelligence-linked stocks and cheered rate cutting cycles in the U.S. and beyond. The S&P 500, the Dow Jones and the Nasdaq have hit record highs this year. So have Japan’s Nikkei 225, South Korea’s Kospi and major European indices like the FTSE 100.

 

They are in line for a rude awakening soon, according to Goldman Chief Executive David Solomon. “It’s likely there’ll be a 10 to 20% drawdown in equity markets sometime in the next 12 to 24 months,” he said, speaking at the Global Financial Leaders’ Investment Summit in Hong Kong. “Things run, and then they pull back so people can reassess.” 

The boss of investment giant Capital Group, which manages $3 trillion, agreed. Mike Gitlin said that while corporate earnings are healthy, valuations are “challenging.” Referring to whether stocks are over or undervalued, he said most people would say they are “somewhere between fair and full, but I don’t think a lot of people would say we’re between cheap and fair.” 

The comments come after Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey raised concerns about the possibility that stocks are overvalued in recent weeks.

The International Monetary Fund also warned last month that there are "echoes" of the 1990s dot-com boom in the current explosion of AI-related spending by U.S. companies. “It was the internet then. It is AI now," said Pierre-Olivier Gourinchas, director of the IMF's research department in mid-October.

 

How Palantir’s smash somehow became bad news

The analytics software and defense firm saw revenue surge 63% over last year to nearly $1.2 billion, outperforming analysts’ $1.09 billion estimate. U.S. commercial sales jumped 121%, driving overall U.S. growth of 77%. Operating margins hit 33% on a GAAP basis and 51% adjusted. Palantir also posted over half a billion in free cash flow and a “Rule of 40” score — a key element of company management’s favored scorecard — of 114, far above the 40% benchmark seen as desirable for elite firms in the field.

CEO Alex Karp credited the company’s Artificial Intelligence Platform for “compounding AI leverage” across both its government and corporate clients. Palantir closed a record 204 deals worth at least $1 million, including 53 above $10 million, with total contract value rising 151% to nearly $3 billion.

Wedbush analyst Dan Ives called the quarter “another validation moment for AI demand,” dubbing Palantir the “Messi of AI.” The firm reiterated its Outperform rating and $230 price target. Palantir, Wedbush wrote, remains “at the forefront of the AI revolution.”

Perhaps that’s the reason for the market caution, at least as of Tuesday morning

The selloff in Palantir and the Nasdaq, set to open down about 1.3%, highlights a tense dynamic: America’s entire stock market has arguably become a leveraged bet on AI. The Magnificent 7 tech giants, and now Palantir, account for a majority of S&P 500 earnings growth and capital spending. When AI optimism drives the market higher, it lifts nearly everything. But when it wobbles, even stellar results can’t escape gravity.

With record profits and still-surging U.S. demand, Palantir is proving it can monetize AI. The question now is whether this boom—so central to both markets and the broader economy—can keep compounding without a correction.