Palantir’s Stock Faces High Expectations Amid Strong Growth
Palantir (NASDAQ: PLTR) experienced a significant decline after its first-quarter earnings report on May 5, but it has since seen a slight recovery. Nevertheless, this bounce-back may be insignificant within the broader context of a potential long-term trend.
The stock appears highly overvalued, raising concerns about its ability to meet the inflated expectations reflected in the current price. So, just how overvalued is Palantir?
Image source: Getty Images.
Strong Business Performance
Palantir’s popularity has surged due to its artificial intelligence (AI)-driven data analytics platform. The software integrates various data streams to provide actionable insights for users. Its new Artificial Intelligence Platform (AIP) automates processes using AI agents, enhancing client efficiency.
This dual-client strategy, serving both government and commercial sectors, has proven crucial for Palantir’s success. Government spending tends to remain stable during economic downturns, and the rising demand for AI solutions has prompted clients from both sectors to increase their spending significantly.
In the first quarter, Palantir’s commercial revenue grew by 33% year over year to $397 million, while government revenue soared by 45% to $487 million. Notably, the U.S. commercial sector demonstrated exceptional growth, with a 71% increase to $255 million. This area is promising as companies seek to capitalize on AI advancements.
Total revenue increased at a pace of 39%, marking Palantir as one of the fastest-growing stocks in the market. The company also projected a Q2 revenue growth of 38%. Although this reflects a slight dip from Q1’s growth, Palantir’s management has consistently outperformed its own forecasts.
Furthermore, profit margins have been improving after a slight drop in the previous quarter.
PLTR Profit Margin (Quarterly) data by YCharts
Challenges Ahead: High Expectations
Despite impressive growth, Palantir’s primary issue lies in the lofty expectations embedded in its stock price. Presently, it trades at extraordinary valuations.
PLTR PE Ratio (Forward) data by YCharts
With a price-to-sales ratio of 104 and a forward price-to-earnings ratio of 224, these levels are exceptionally rare for stocks. Historically, when stocks reach such lofty valuations, they often fail to meet growth expectations, leading to significant declines. Although Palantir has maintained its position at these valuations for a while, the stock remains precariously positioned.
To illustrate the growth expectations already baked into Palantir’s stock, consider the following assumptions:
- Palantir’s revenue growth accelerates to 40% and sustains that pace over five years.
- Its profit margin expands to 30%.
- Stock-based compensation effects are ignored.
If all these conditions are met, Palantir could generate nearly $17 billion in revenue and $5 billion in profits within five years. While this growth would be significant from current levels, valuing the stock at its current market cap of approximately $300 billion would result in around 19 times sales and 61 times earnings—much more reasonable valuations comparable to major stocks like Nvidia (NASDAQ: NVDA), which trades at roughly 46 times earnings. Achieving this valuation requires the stock to remain stagnant for five years.
That is an extended waiting period with no growth, emphasizing why Palantir’s stock is considered overpriced at present. While the timing of the downturn is uncertain, history suggests that stocks priced this highly rarely succeed in meeting investor expectations.
Investment Considerations for Palantir Technologies
Before investing in Palantir Technologies, it is essential to weigh these factors:
Recently, an analyst team highlighted the 10 best stocks for investors to consider, and Palantir was not included. The stocks on the list are projected to yield substantial returns in the future.
For example, consider this: when Netflix made this list on December 17, 2004, a $1,000 investment would have grown to $620,719!
Similarly, Nvidia was recommended on April 15, 2005, and a $1,000 investment would now be worth $829,511!
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Note: The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.
