Palantir, the data analytics software company, is experiencing significant growth following its well-received earnings report. The company's stock has surged by an additional 4% on Wednesday, bringing its year-to-date gain to an impressive 45%. Over the past 12 months, the stock has rallied by over 170%.

Analyst Recommends Taking Profits

However, one analyst believes it is time for investors to consider taking some profits. Stephen Bersey, head of technology research at HSBC Global Research, has downgraded Palantir shares from Buy to Hold. Despite this downgrade, he maintains a target price of $22, which is only about $3 below the stock's recent levels. Bersey expresses concerns about the stock's heightened valuation resulting from its ongoing rally.

Bullish on Palantir's Fundamentals

Despite the downgrade, Bersey remains bullish on Palantir's fundamentals. He believes that the company can achieve a compounded annual growth rate for earnings of more than 24% through 2028. In the December quarter, Palantir's commercial revenue reached $284 million, surpassing Wall Street's forecast of $271 million and representing a 32% YoY increase. The U.S. commercial business saw remarkable growth at 70%.

Strong Demand for Artificial Intelligence Products

Palantir is well-positioned to benefit from the strong demand for its artificial intelligence products, especially in the faster-growing Commercial segment. Additionally, growth in the Government segment is expected to accelerate with potential government contracts in 2024 and increased defense spending, according to Bersey. The company's commercial business is experiencing a robust acceleration, particularly in the U.S., driven by strong demand for their AI Platform.

Valuation Concerns and Rating Downgrade

Bersey points out that Palantir's stock now trades at over 76 times his estimated non-GAAP per-share earnings for 2024. This is more than twice the valuation of other software stocks he tracks. The premium is even higher when using GAAP, with Palantir trading at over 105 times this year's earnings compared to the sector's average of 47 times. Considering the stock's recent strong performance, Bersey downgrades his rating to Hold, citing the stock's full valuation.

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