Investing.com -- Jefferies reiterated an Underperform rating on Palantir (NASDAQ:PLTR) stock, with its $28 price target implying a 65% downside risk from the current levels.

Jefferies analysts pointed out the challenges Palantir may face in the fourth quarter of 2024, as the company is expected to lap more difficult comparisons from the previous year. They highlighted that Palantir stock is the most expensive within the software sector, trading at 50 times next twelve months (NTM) revenue, which is more than double the valuation of its next highest peer.

“The 4Q setup will be challenging as PLTR is lapping easy comps and any signs of non-accelerating growth could lead to further multiple compression,” analysts led by Brent Thill said in a note.

The analysts also noted Palantir's accelerated approximately $120 million in unrecognized stock-based compensation (SBC) expense associated with market-vesting stock appreciation rights (SARs) due to the stock price crossing $50 per share.

As a result, Jefferies trimmed its fourth-quarter 2024 GAAP earnings per share (EPS) estimate to $0.01 from $0.06, with no change to non-GAAP EPS. Additionally, Jefferies raised the share count to 2.488 billion from 2.474 billion to reflect the dilution from these SARs.

While Palantir's fundamentals remain robust, the company would need to accelerate its growth to 50% for four years and trade at 13.5 times calendar year 2028 estimated revenue just to maintain its current stock price.

Palantir's enterprise value (EV) to NTM revenue multiple has compressed by 5% year-to-date, following a 282% expansion in 2024. “The last time we saw such high magnitudes of multiple expansion was during the Covid bubble when many of the high growth names benefited from multiple expansion,” analysts said.

They believe that any negative factors, such as decelerating growth or changing interest rates, could cause further compression in the company's valuation multiple.

In a “what if” scenario, Jefferies illustrated that even if Palantir could accelerate its growth to a 50% four-year compound annual growth rate (CAGR), the stock would still need to trade at a multiple that would place it among the richest names in software four years out, just to keep its current price level.

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