Palantir Shares: Advise on Purchase, Sale, or Retention
Palantir Technologies Shares (NASDAQ: PLTR) have seen an increase of over 4 times since the beginning of the year, trading around $74 per share currently. However, we believe this investment could be risky at this moment for a few reasons, such as its inflated valuation (over 150 times projected FY'25 earnings), heavy reliance on government contracts, and notable insider selling of the stock. Let's examine the factors contributing to the stock's rise lately and why caution might be advisable at current levels.
What's Propelling the Surge?
The initial surge was driven by market enthusiasm around artificial intelligence stocks as well as solid earnings in recent quarters. However, the momentum picked up after the U.S. elections. In fact, the stock has surged nearly 80% since election day. Investors have confidence that a Trump-led Republican administration will boost public spending on national security and immigration, resulting in demand for Palantir's software solutions. Co-founder Peter Thiel's support of Trump and his supposed influence within the new administration have also played a role. Furthermore, Palantir has recently been added to the Nasdaq-100 after its annual reconstitution. The stock shifted from the NYSE to the Nasdaq in late November, and its Nasdaq-100 inclusion has likely increased demand for the stock from exchange-traded funds. Alternatively, the Superior Performance Portfolio, which has outperformed the S&P 500, and recorded over 91% returns since inception, could offer potential upside with less turbulence than an individual stock.
Potential Challenges
Government sales focus
A potential drawback is the heavy emphasis on government contracts. These sales tend to be unpredictable and lumpier in nature, making them less dependable. Palantir has announced that the commercial market provides a larger opportunity. Palantir's Foundry platform intended for commercial users is used in various sectors, including manufacturing, retail, and healthcare. However, the company's commercial performance has not been impressive. Commercial-related sales increased 27% to $317 million in Q3, falling short of expectations, while the government segment exceeded expectations. Selling to smaller and medium-sized businesses may be challenging due to the large and complex implementation costs associated with Palantir's product. Palantir faces competition from established tech giants like Microsoft and from specialized data analytics companies.
The PLTR stock's growth over the past 4-year period has been inconsistent, with annual returns significantly more volatile than the S&P 500. Returns in 2021 and 2022 were -23% and -65% respectively; however, the stock soared 167% in 2023. In contrast, the Superior Performance Portfolio, with its collection of 30 stocks, has shown less volatility and has outperformed the S&P 500 each year during this time period. Why is that? The portfolio's companies delivered better returns with less risk versus the benchmark index, providing a smoother ride as evidenced by the portfolio's performance metrics. What's next for the stock?
Elevated valuation
Palantir's valuation, following the rally, seems excessive in our view. The stock trades at 48x projected revenue and more than 150x consensus FY'25 earnings. However, the company's growth rates are estimated to be around 25% for both 2024 and 2025, in line with those of cloud data warehousing and analytics player Snowflake, which also trades at around 12x revenues. AI powerhouse Nvidia stock trades at around 30x estimated earnings for the following fiscal year, despite projected revenues set to double and a potential 50% growth rate in the next fiscal year. (Should you Buy, Sell, Or Hold Nvidia Stock?)
Increased insider selling
Insider selling of Palantir stock has also been on the rise recently. CEO Alex Karp has offloaded nearly 40 million shares, while President Stephen Cohen has sold over $90 million worth of stock. This could indicate that insiders believe the stock is overvalued, and further insider selling may put additional pressure on the stock price. Economic uncertainty also adds another layer of complexity. While markets have rebounded following the election, the risk of inflation persists due to potential tariffs and deportation policies. These factors could impact interest rates and, subsequently, the valuation of high-growth stocks such as Palantir. (Will the S&P 500 Crash More Than 40%?)
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The Pltr revenue for the latest quarter surpassed expectations, contributing to the company's overall revenue growth. However, despite Pltr's valuation reaching over 150 times projected FY'25 earnings, Palantir's stock continues to be in high demand among investors, largely due to its potential in the commercial market and the optimistic outlook for government contracts under a Trump-led administration.
