Palantir Shares Surged by 4.5 Times in 2021: Is It Worth Reconsidering?
Palantir Tech's (NASDAQ: PLTR) share price has climbeds near 11% over the past five trading sessions. The stock has also skyrocketed over 4.5 times since the start of the year, currently trading at around $80 per share. So, what's fueling these recent price surges? Separately, Intel is grappling with challenges during its restructuring, check out Is Intel Stock Set to Plummet by $10?
As reported by the Financial Times last week, Palantir and fellow U.S. tech company Anduril have been in talks with other tech giants such as SpaceX owned by Elon Musk, aiming to form a consortium. This consortium would potentially jointly bid for U.S. government defense contracts, historically controlled by a handful of "prime" contractors like Lockheed Martin and Raytheon. While these traditional contractors specialize in developing expensive and long-lead-time assets like ships, tanks, and aircraft, there could be a shift towards more affordable, autonomous weaponry from Silicon Valley startups and advanced AI software, which Palantir excels in. This change could potentially expand companies like Palantir's share of the whopping $850 billion+ U.S. defense budget.
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A substantial portion of Palantir's price increase can also be attributed to the market buzz surrounding AI stocks and solid quarterly earnings. The rally has significantly gained traction after the U.S. elections. The share price has almost doubled since election day. Investors are hopeful that a Trump-led Republican administration will boost federal spending on national security and immigration, boosting Palantir's software tools demand. Co-founder Peter Thiel, who is an early Trump supporter, is also seen as holding significant sway within the incoming administration. The stock's price has also risen due to technical factors. Palantir has been added to the Nasdaq-100 following the index's annual reconstitution, and the move from the NYSE to the Nasdaq has likely increased demand for the stock from exchange-traded funds.
However, Palantir's share price performance over the last three years has been far from consistent, with substantial annual volatility compared to the S&P 500. Returns for the stock were -23% in 2021, -65% in 2022, and 167% in 2023. In contrast, the Top-Tier portfolio has exhibited less volatility and outperformed the S&P 500 every year over the same period. The reason for this gap is that the portfolio's constituent stocks have provided better returns with lower risk versus the benchmark index, offering a less extreme ride as shown in the portfolio's performance metrics. Given the current uncertain macroeconomic situation with potential rate cuts and multiple conflicts, could Palantir face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months - or will it experience a robust surge?
We believe the stock is a high-risk investment at the moment due to multiple reasons, including its high valuation, strong reliance on government sales, and substantial insider selling in the stock. For further insights on Palantir's key risks, head over to Exploring Palantir's Key Challenges The stock currently trades at over 50x projected FY'25 revenue and more than 170x projected FY'25 earnings. However, the company's growth rates are pegged at just around 25% for both 2024 and 2025, according to consensus estimates. In comparison, cloud data warehousing and analytics player Snowflake trades at about 12x revenues, with comparable growth rates. In fact, AI leader Nvidia stock trades at roughly 30x estimated earnings for the upcoming fiscal year, even though revenues are expected to more than double this year, with the consensus predicting over 50% growth for the following year. (Should you Buy, Sell, or Hold Nvidia Stock?) Although we do believe that Palantir will see increased demand for its products and services as AI adoption expands in the commercial sphere, we feel that its current valuation is detached from its fundamentals.
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The potential formation of a consortium between Palantir and other tech companies could provide a significant upside for Palantir's stock, as they aim to jointly bid for U.S. government defense contracts. On the other hand, Palantir's stock's high valuation and strong reliance on government sales make it a high-risk investment, with a current trading price of over 50 times projected FY'25 revenue.
