In This Article:
Key Points
-
Palantir's current valuation is proof that financial markets can stay irrational longer than you might expect.
-
While its revenues are rising, they aren't growing fast enough to justify its lofty premium.
-
The amount of stock-based compensation it distributes is also problematic for shareholders.
With its shares up 58% year to date, Palantir Technologies (NASDAQ: PLTR) embarrassed its naysayers -- it has been repeatedly testing new highs despite calls of overvaluation. But on some level, the excitement is understandable.
Palantir operates at the intersection of two of the market's biggest hype drivers right now: generative AI and President Donald Trump's election. But could these catalysts help the data analytics giant justify its valuation over the next three years and beyond?
Why is Palantir so popular right now?
Since its initial public offering in 2020, Palantir enjoyed a bit of a cult following, and it isn't hard to see why many people find the data analytics business exciting. In its early days, it was partially backed by the CIA's investment arm, Q-Tel, and its software helped the U.S. track down Osama bin Laden in 2011. Recently, the company began offering its Artificial Intelligence Platform (AIP), designed to offer real-time insights to operators in high-stakes environments like battlefields. Similar technology is already being used by the armed forces of Ukraine and Israel in their respective conflicts.
With its combination of mystery and accessibility, Palantir developed a broad appeal as an investment: It's one of the top 10 most-held stocks in portfolios on the retail investor-friendly platform Robinhood. But retail investors can often prioritize hype over substance: Failing meme stock GameStop is right behind it on Robinhood's top 10 list. While Palantir isn't a meme stock, it is arguably beginning to blur the line.
The valuation is unbelievable
With a price-to-earnings (P/E) ratio of 480, Palantir trades at a huge premium. For context, the tech-heavy Nasdaq-100 has an average P/E of just 29. And the AI industry leader, Nvidia, trades for a P/E of 39, despite growing its profits by a whopping 80% in the fourth quarter.
Palantir's business is not growing fast enough to justify its premium. Revenue grew by a respectable 39% year over year to $883.9 million, driven by strength in its US commercial segment (up by 71%, where it sells data analytics tools for enterprise use.
However, analysts are worried about its international segment. Overseas sales fell by 5% year over year because of weakness in Europe, where businesses have been slow to adopt AI-related services compared to the U.S. and China. However, this has more to do with the continent's corporate culture, which is outside of Palantir's control. Palantir's non-cash outflows may be a bigger red flag.