Palantir (PLTR) has been hit with a downgrade to "Underperform" by Jeffries, which also slashed its price target to $13. The firm argues that Palantir's valuation has become unsustainable on the back of an artificial intelligence boom that has not yet materialized. Jeffries Senior Analyst Brent Thill joins Yahoo Finance to discuss the reason for the move.

While acknowledging Palantir has promising technology, Thill believes "the hype is ahead of the reality." He notes that while AI adoption will grow, "AI is a driver, but it's gonna be a slower revenue materialization" than the market expects for Palantir currently.

Thill highlights software firms like Microsoft (MSFT) and Adobe (ADBE) which boast "the best product line-ups" spanning multiple sectors, not just an AI niche. For Palantir and similarly hyped names, he advises investors to wait until the AI hype wears off "and then come back to these names at a lower level." The downgrade is a reality check that Palantir's value may have become inflated beyond reasonability in anticipation of an AI boom that has yet to emerge.

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Editor's note: This article was written by Angel Smith

Video Transcript

RACHELLE AKUFFO: Jeffries downgrading Palantir this morning to underperform from hold. Slashing its price target to $13 from $18. The firm says the company has seen quote, "unsustainable valuation levels on the back of AI euphoria." But reiterates that long-term, Palantir still has an AI technology advantage.

For more on the software space, we're joined by Brent Thill, Jefferies senior analyst. Thank you for joining us, Brent. So talk about this note here and this bearish stance that we started to see that really in mid-November regarding Palantir and this euphoria here. But what brought you to this decision?

BRENT THILL: Yeah. We think Palantir's a fundamentally amazing business. We're talking about the stock. And the company had-- stock had a huge outperformance last year on the hype of AI. And I think what we're seeing is AI is a driver, but it's going to be a slower revenue materialization to the overall impact of the story, and many stories, including Microsoft and others.

So we are huge fans of what's going to happen due to AI. But, again, as we said that the hype is ahead of the reality. And we think, again, the stock, given the magnitude, the outperformance last year, we simply just like other names in software, like monday.com, Microsoft, there's a handful of others that we like better.

So it's a relative call. It's a call that, hey, stock had a huge move. There's no-- there's no smoking agenda here in terms of something that's happening that we detected or feel checks or any of that. That's not the case. The case of this is just more of we like other names better. And this was one of the top performing names last year in the software industry.

RACHELLE AKUFFO: And, obviously, a lot of people were wondering when we were going to really get to see some of these companies in terms of the timeline of when we'd really get to see this affecting the actual fundamental business here.

So are there any other names in this space, then that have really benefited from the AI stock boom that we saw last year, that perhaps could do with a little more scrutiny?

BRENT THILL: Well, the big winners in AI in software last year were Microsoft and Adobe. They have the best product lineups, and the best product shipping. They also had phenomenal returns anywhere between 50 to 80 plus percent returns last year for the two stocks.

So I think our AI picks have done well. Clearly, some of the smaller emerging names did better. But what you do is you have the diversity of the stories at Adobe and Microsoft, it's not all about AI. In fact, we did a CIO survey in December. And that survey suggests that AI is probably fifth or sixth on their priority list.

Moving to public cloud, continued roll out of productivity applications, other things are more important than AI. So I think we have a list of names that will benefit, which, again, intuit, Microsoft, Adobe. There's a handful of great names in large cap. There's an emerging group of small cap names that are going to benefit as well. But I think what you want to be careful is given the magnitude of the move on all the AI hype, it's, typically, best to let that wear off. And then come back to these names at a lower level.

So we're big believers again, as they say, we're going to overestimate the near-term and underestimate the long term. And I think the long-term looks really good, as it relates to the AI adoption that's just going to take time.

And today, when it looked as a percent of revenue, these companies, it's all single digit percent of revenue of overall revenue streams for the majority of our companies we cover.