It was a year to remember for the shareholders of a data analytics and artificial intelligence (AI) software company. Palantir Technologies (NYSE:PLTR). The stock is up more than 160% in the past year, and the committee that determines which companies deserve stock membership S&P500 added it to the large-cap benchmark index this month. Index inclusion is a badge of honor that recognizes a company’s strong performance and increases investor awareness.
Palantir’s products, especially the AIP platform, are driving accelerated revenue growth and strong profitability. However, the share price has grown faster than the underlying business. Should shareholders consider selling while they’re ahead, or does Palantir have more room to run?
The stock has outpaced the company
I’m not here to criticize Palantir’s business. There’s a lot to be excited about.
The company has emerged as perhaps the leading AI software play on Wall Street. It debuted the AIP platform last year as a tool for companies to develop and deploy custom AI applications, and revenue growth has steadily accelerated since then. Technology consultancy firm Forrester research recently recognized AIP as the best AI and machine learning platform on the market.
And yes, its inclusion in the S&P 500 has likely created some buying momentum for the stock. Funds that track the S&P 500 must add Palantir shares to reflect the index, and many investors are drawn to S&P 500 companies because they must meet strict standards to get into the index.
The problem is that the stock’s price gains have dramatically exceeded the company’s growth. Palantir’s revenue over the last twelve months has grown by approximately 16% in total. The valuation of the share is almost a factor of 10 higher than that of the stock.
PLTR Earnings Data (TTM) according to YCharts.
How expensive is Palantir?
In reality, stock prices at any given time are a strong reflection of the market’s enthusiasm for that stock. Part of investing is recognizing when the market is overexcited or pessimistic.
Right now, market sentiment towards Palanir is borderline insane.
Remember the “everything bubble” of 2020-2021, when zero percent interest rates and ransom budget policies implemented to keep the economy stable during the pandemic crisis culminated in a speculative bubble over growth stocks, cryptocurrencies and other assets? While broad market indexes are now back to new all-time highs, many growth stocks are still trading at fractions of the valuations they reached at the peak of the bubble.
Still, on a price-to-sales (P/S) basis, Palantir is approaching the highest valuations it had during the bubble.
PLTR PS Ratio data according to YCharts.
Analysts believe the company will generate revenues of $2.76 billion in 2024 and $3.32 billion in 2025. The stock trades at a price-to-earnings ratio of 25, based on next year’s revenue estimates. If the stock eventually settles somewhere in the middle of this broad range at a long-term P/S ratio (say, 15 times sales), the chart could remain flat or decline for years as the company grows enough to catch up to catch up. the share price.
Should Investors Sell Palantir?
Palantir’s valuation has arguably entered bubble territory, and a number of factors could lead to the bursting of that bubble. There is political uncertainty as the US elections approach. Geopolitical tensions are escalating in Europe and the Middle East. With US inflation largely back under control, the Federal Reserve has started cutting interest rates, which should stimulate the economy. But when such stimulus is needed, it is sometimes because the country is heading toward a recession.
Stock bubbles can also burst on their own. Remember that high ratings create high expectations. Palantir’s shares could continue to rise until the company inevitably falls short of the impossibly high standards the market has baked into the stock price. Once this happens, the resulting correction can be severe.
In other words, stock bubbles are like a game of musical chairs. They always end eventually.
For investors, it’s hard to sell winners while they’re still winning, and anyone who just bought Palantir in the last few months has probably made fantastic gains and is feeling good. But it may be wise to sell some shares to safeguard your profits. Otherwise, you might regret it when the music stops.
Should You Invest $1,000 in Palantir Technologies Now?
Consider the following before purchasing shares in Palantir Technologies:
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
