After a nearly two-and-a-half-year bull run on Wall Street, there are a lot of stocks trading at elevated valuations. Much of the market's run was powered by artificial intelligence (AI) stocks that investors are so bullish about that there's seemingly no valuation high enough to give them pause. Few stocks have benefited from investors' thirst for AI exposure more than Palantir Technologies (NASDAQ: PLTR), which is now up by more than 790% over the last five years.
But other stocks in sectors that have nothing to do with AI have joined the party as well, one being Costco Wholesale(NASDAQ: COST). The beloved warehouse retailer hasn't changed the price of its hot dogs since the mid-1980s, and consumers seemingly can't get enough of its products. Likewise, Wall Street can't get enough of the stock, which is now up over 187% in the last five years, a huge move for a large-cap consumer staples company.
With those impressive climbs in mind, which one of these stocks is more overvalued today?
Palantir: Trades at 152 times forward earnings
Palantir provides its clients with the ability to gather large volumes of data from different sources and use complex AI models to analyze that data like never before. This includes drawing up potential scenarios and outcomes and offering real-time insights about how to solve problems. The technology can be useful for a wide array of purposes, from the U.S. Department of Defense working on counterterrorism efforts to a business attempting to solve a tricky logistical issue.
Investors have flocked to the stock, which as of Feb. 27 traded at $84.68 a share, with a forward price-to-earnings (P/E) ratio of 152 -- and that was after a nearly 20% sell-off in the week prior. Over the last three months, 18 Wall Street analysts have issued research reports on Palantir. Four have rated the stock a buy, nine call it a hold, and five rate it a sell, according to TipRanks. Their average 12-month price target is about 10% higher than its recent level.
Many investors assumed the stock was vulnerable to a correction heading into its fourth-quarter earnings report in early February. However, after Palantir beat analysts' estimates on both earnings and revenue and provided better guidance than Wall Street expected, the stock soared. Last week, RBC Capital analyst Rishi Jaluria put an underperform rating and a $40 price target on the stock. Jaluria expressed concern about the resignation of the company's chief accounting officer, expected defense spending cuts by the U.S. government, and a new agreement with CEO Alex Karp that allows him to sell nearly 10 million of his Palantir shares through early September of this year.
On the other hand, Loop Capital analyst Mark Schappel recently initiated coverage of Palantir with a buy rating and $141 price target, saying the AI company has all the makings of a game-changing software stock, including a massive addressable market, a strong management team, and the potential to be an industry leader.
Costco: Trades at 56 times forward earnings
While it doesn't sport a valuation at quite the same nosebleed level as Palantir, I don't think many people would have expected this kind of re-rating for a company that has historically been viewed as a defensive stock. Investors have long believed in Costco's business model, which involves selling products in bulk to consumers at bargain prices. It also charges people annual membership fees for access to its warehouse stores -- fees that provide the bulk of its profits and create a solid stream of recurring revenue. In recent years, Costo has ramped up its e-commerce business. In its fiscal 2025 first quarter, which ended in late November, the company's e-commerce sales grew 13% year over year.
Over the last three months, 24 Wall Street analysts issued research reports on the retailer, with 16 rating its stock a buy and eight rating it a hold, according to TipRanks. The average 12-month price target among those analysts is about 6.4% higher than its level as of Feb. 27.
Costco has continued to roll along to start the year, reporting January U.S. sales that were significantly ahead of the consensus expectation. The chain is also planning to open 29 new stores in its fiscal 2025.
Although the market has been concerned lately about the weakening financial condition of the U.S. consumer, Costco tends to be more resilient during economic downturns because of its membership model and the fact that it serves many higher-income customers. Still, throughout Costco's long history as a publicly traded company, its trailing-12-month P/E ratio has never been as high as it has been lately.
In fairness, both stocks look overvalued to me, despite each company's strong and improving results. However, these companies operate in very different sectors. Palantir is a tech sector player with a focus on AI -- an industry where a host of fundamental factors remain cloudy, from just how big the market for AI actually is to how disruptive it could be to how easy its models would be to replicate.
Costco, on the other hand, has a consistent and reliable business model in a fairly well understood retail industry. There is also a growth story baked in when you consider its growing e-commerce sales and its expansion in the U.S. and internationally.
Ultimately, between the two, I think Palantir is the riskier bet right now because of the unknowns regarding AI, but it also has more upside potential. Costco's re-rating seems real, but it's hard to know if it will be able to maintain this high of a valuation. Both stocks are susceptible to pullbacks.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Palantir Technologies. The Motley Fool has a disclosure policy.
