Palantir Technologies (NYSE: PLTR) has seen its share price surge 170% since January as investors have become increasingly confident in the company's artificial intelligence (AI) software. That makes Palantir the third-best performing stock in the S&P 500 (SNPINDEX: ^GSPC) year to date. Only Vistra and Nvidia have been more rewarding investments.

However, Wall Street is overwhelming bearish where Palantir is concerned. Among the 23 analysts that follow the company, the median target price is $28 per share. That implies 40% downside from the current share price of $47. Additionally, because median refers to the middle value, it means half of analysts anticipate more than 40% downside.

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Here's what investors should know about Palantir and its red-hot stock.

Palantir is a leader in artificial intelligence platforms

Palantir specializes in big data analytics. Its core software products, Foundry and Gotham, let businesses capture information and develop machine learning (ML) models. Its adjacent AIP product adds natural language processing capabilities to Foundry and Gotham, which makes it possible for clients to incorporate large language models into analytical applications.

Collectively, those products let businesses integrate data and models into an ontology, a digital representation of the real world that defines the relationships between physical objects. Users can explore ontology data and surface insights with out-of-the-box tools or custom-built analytics applications. Palantir's ontology-based architecture distinguishes its software from competing solutions.

Importantly, Palantir has received high praise from several industry observers. Forrester Research recently recognized its leaderhip in AI/ML platforms. AIP received a higher score for its current capabilities than any other product, and analysts wrote, "Palantir is quietly becoming one of the largest players in this market."

Likewise, Dresner Advisory Services listed Palantir as a top-ranked vendor in two recent market studies. The first report examined software for artificial intelligence, data science, and machine learning. The second report examined software for model operations, a discipline that deals managing models across their lifecycle -- from development and deployment to monitoring and maintenance.

Palantir just reported exceptional third-quarter financial results

Palantir overcame high expectations with its third-quarter financial report on Nov. 4, exceeding estimates on the top and bottom lines. Its customer count climbed 39% to 629, and the average existing customer spent 18% more. In turn, revenue increased 30% to $726 million, the fifth consecutive sequential acceleration, and non-GAAP earnings surged 43% to $0.10 per diluted share.

"The release of our newest platform, AIP, has transformed our business," wrote CEO Alex Karp in his latest shareholder letter. "The growth of our business is accelerating, and our financial performance is exceeding expectations as we meet an unwavering demand for the most advanced artificial intelligence technologies from our U.S. government and commercial customers."

Palantir's stock is absurdly expensive compared to Wall Street's earnings estimates

Looking ahead, the International Data Corp. (IDC) estimates AI platform sales will increase at 41% annually through 2028. That should drive demand for AIP, which itself should be a tailwind for Palantir's business. But investors should not confuse a good business with a good stock. Palantir shares are absurdly expensive at their current valuation.

To elaborate, Wall Street expects the company's adjusted earnings to increase 17% over the next 12 months. That makes the current multiple of 133 times adjusted earnings look like a wild overvaluation. Those figures give Palantir a PEG ratio of 7.8. For context, PEG ratios exceeding 2 are generally considered pricey. But a reading approaching 8 is simply off the charts.

In that context, Wall Street's median price target of $28 per share seems quite plausible, which means Palantir stock could indeed decline 40%. Prospective investors should steer clear, and current shareholders should consider trimming their positions. That said, there is no guarantee Palantir shares lose momentum anytime soon. So, investors that reduce their exposure today shouldn't overthink the decision if the stock climbs higher in the coming weeks and months.

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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

Should You Buy Palantir Stock After Its 170% Gain in 2024? Wall Street Has a Clear Answer for Investors was originally published by The Motley Fool