HomeMarket News Unraveling Palantir Technologies Stock: A Deep Dive Unraveling Palantir Technologies Stock: A Deep...

Unraveling Palantir Technologies Stock: A Deep Dive Unraveling Palantir Technologies Stock: A Deep Dive

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Share prices of Palantir Technologies (NYSE: PLTR) witnessed a significant setback, plunging by over 6% following an analyst downgrade by Brian White of Monness, Crespi, Hardt & Co. The downgrade to sell from neutral was accompanied by a cautionary note regarding the stock’s valuation, which has reached unprecedented levels due to the AI software market’s hype.

Despite the recent drop, Palantir’s stock has soared an impressive 185% in the past year on the back of its AI software market success. The contentious question now is whether this pullback presents a cautionary tale for investors or an opportune moment for the savvy to delve into Palantir. Let’s explore further.

The Price Conundrum: Palantir Technologies is indeed expensive right now

White’s remarks highlight the stark reality of Palantir’s valuations amidst an intense AI hype cycle, characterizing it as “egregiously rich.” A detailed examination of the company’s multiples reveals a valuation significantly above industry benchmarks.

Presently, Palantir boasts a price-to-sales ratio of 24.6 and a staggering 264 times trailing earnings, far surpassing the Nasdaq-100 Technology Sector index’s sales multiple of 7.3 and earnings multiple of 47. While Palantir’s revenue growth has not been as robust as some of its peers, particularly evident in its 17% growth in 2023, a fourfold increase in earnings per share showcases strong margins.

Palantir’s CEO, Alex Karp, emphasized the company’s robust unit economics during the February earnings call, signaling the ability to generate enhanced returns per customer. With a projected annual earnings growth rate of 85% over the next five years, Palantir could possibly justify its lofty valuation. If sustained, this growth trajectory could see Palantir achieve significant bottom-line expansion by 2028.

The Nasdaq-100 typically trades at an average forward earnings multiple of 28. Should Palantir align with this multiple post five years and meet projected earnings, its stock price may catapult to $150 per share, a substantial leap from current levels. This anticipated growth trajectory explains the relatively lower forward earnings multiples for Palantir.

The AI Propulsion: AI is accelerating Palantir’s business

For Palantir, AI transcends mere industry hype, representing a tangible driver of growth for the company. This transformation is evident in several key operational metrics.

In Q4 of 2023, Palantir sealed 103 deals exceeding $1 million each, a significant uptick from the 55 similar deals in the corresponding period the previous year. Notably, clients are now engaging in larger transactions with Palantir, culminating in 37 deals surpassing $5 million and 21 surpassing $10 million during Q4 2023, reflecting substantial growth from the previous year.

The upsurge in deal activity propelled Palantir’s remaining performance obligations (RPO) to $1.24 billion by the end of 2023, nearly 28% higher than the previous year. This metric, referring to the total value of the company’s future contractual obligations, outpaced Palantir’s revenue growth, indicating a promising trajectory for long-term growth.

Praising the adoption of its Artificial Intelligence Platform (AIP) for enabling AI applications deployment in various business contexts, Palantir attributes the surge in deal activity to this strategic evolution. With the AI software market projected to surpass $1 trillion in annual revenue by 2032, considerable growth opportunities beckon Palantir in the foreseeable future.

The Investment Verdict: What should investors do?

While Palantir’s lofty valuation may seem daunting, the narrative is not without optimism. A blend of robust top- and bottom-line growth could potentially validate its current valuation. The tangible impact of AI on Palantir’s operations and the escalating business wins could pave the way for improved earnings growth driven by an expanding margin profile.

Hence, in the face of potential further retreat post the analyst downgrade, prudent investors could contemplate amassing Palantir stocks for the long haul, considering its trajectory as a prominent AI software entity.

Should $1,000 be invested in Palantir Technologies right now?

Prior to delving into Palantir Technologies’ stocks, a prudent evaluation is advisable:

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Harsh Chauhan holds no position in stocks discussed. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool adheres to a disclosure policy.

The opinions and views expressed herein are solely the author’s and do not necessarily align with those of Nasdaq, Inc.

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