As we enter the back half of 2024, I believe it’s time for a reality check. While the software rally has been fun, not all of these high-flying software stocks can justify their nosebleed valuations. Some appear bound to come back down to Earth.
It’s worth digging deeper into Palantir (NYSE:PLTR), Salesforce (NYSE:CRM), and Snowflake (NYSE:SNOW) today. These software darlings have very different stories. Palantir is riding high on its AI prospects and improving profitability. Salesforce stumbled last quarter and looks vulnerable. Snowflake faces intense competition in the crowded big data and cloud space, underperforming of late.
I’ll examine the bull and bear cases for each of these software stocks and attempt to determine which one, based on their current valuation, could end up as a winner this year. Let’s dive in!
Palantir (PLTR)
Palantir has soared back to 2021 bubble levels. In Q1 2024, Palantir delivered 21% revenue growth and its sixth consecutive quarter of GAAP profitability. The company’s U.S. commercial business has been especially impressive, with revenue up 68% year-over-year.
However, I have some concerns about the sustainability of Palantir’s valuation. The stock is currently trading at a nosebleed forward price-earnings ratio of 84-times. Wall Street is pricing in extremely optimistic growth assumptions. Of course, Palantir’s government contracts provide a stable revenue base, but I’m skeptical that this alone justifies such a premium multiple.
I wouldn’t be surprised to see the stock take a breather once the AI hype dies down a bit. Wedbush analyst Dan Ives sees Palantir as a key beneficiary of the “AI party”, but at some point, the music stops. For context, the average analyst price target of $22.60 implies 18.4% downside from current levels.
Salesforce (CRM)
Salesforce’s stock has faced some headwinds in recent months, correcting more than 20% since March highs, despite a modest recovery. The company reported lower-than-expected Q1 FY2025 revenue of $9.13 billion, missing estimates. Additionally, Salesforce provided weak Q2 guidance. This led several analysts to lower their price targets on CRM stock. Notably, Citi (NYSE:C) cut its price target from $323 to $260 per share. Key concerns leading to this cut included slowing growth in a challenging macro environment, go-to-market adjustments, and execution issues.
While Salesforce is maintaining its full-year outlook and betting on continued strong demand for its AI initiatives, I believe the stock is more of a hold at current levels. Trading around 25-times FY2025 earnings estimates, Salesforce appears fairly valued for now, given recent growth deceleration. The company has a wide moat and is well-positioned for the AI era, but its upside potential seems limited in the near-term.
Thus, I view Salesforce as a long-term buy and hold opportunity with little significant downside risk. However, I also think investors may want to wait for more tangible signs of reaccelerating growth before getting too bullish on CRM stock. The next few quarters will be telling in terms of Salesforce’s ability to navigate the macro headwinds and monetize its AI investments.
Snowflake (SNOW)
Snowflake stock has been under pressure recently. On a year-to-date basis, SNOW stock has declined 27%, at the time of writing. The company continues to faced a range of headwinds, including the rationalization of IT budgets by customers looking to optimize data consumption to reduce costs. This has led to a lukewarm market response to Snowflake’s Q1 2025 earnings, as the company’s full-year projected 24% revenue growth seemed modest compared to previous years. Plus, Snowflake reported a rather wide miss on its key earnings per share metric as well.
However, I believe the current dip presents a compelling buying opportunity for long-term investors. Snowflake’s core business remains strong, with product revenue growing 34% year-over-year to $790 million in Q1. The company’s remaining performance obligations (RPO) also accelerated 46% to $5 billion. Additionally, Snowflake’s Cortex AI offering is already generating strong customer interest. As of Q1, more than 750 customers were using the AI product.
If the company can meet growth expectations going forward, I believe SNOW stock can deliver outsized gains in 2024 and beyond. Analysts expect earnings per share to recover to $1 next year and nearly quadruple by 2030. Additionally, 25 out of 32 analysts rated this stock as a strong buy. The average price target of $203.60 per share implies substantial 47.3% upside from current levels. Thus, I think this is a stock that could deliver oversized upside this year.
On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
