Market Participants Flock to Palantir Shares following Revenue Surge. Is Joining the Bandwagon Wise?
PLTR (decrease by -1.80%) has been one of the year's standout stocks, surging approximately 275% up until now. A significant portion of this rise occurred post-Palantir's impressive third-quarter earnings, with the stock shooting up 23% the day after. This momentum has persisted beyond the earnings announcement, with the stock climbing an additional 56% since.
Numerous investors are showing interest in PLTR's shares, but is this a wise move considering the significant appreciation and lofty expectations?
Palantir's offerings have seen broad adoption
Palantir is an innovative company in the field of artificial intelligence (AI), initially gaining recognition for creating tailored AI models for government entities. It eventually expanded its reach into commercial markets. As of Q3, government business continues to account for the majority of its revenue, representing 56% of total income.
Palantir's AI system provides real-time recommendations to decision-makers based on the data it processes. Given the high volume of real-time choices governments and businesses must make, it's not surprising that Palantir's business is growing rapidly, with numerous clients eagerly implementing AI into their operations.
Palantir has also released the Artificial Intelligence Platform (AIP), which enables clients to incorporate AI across their organization at large. This is a distinct advantage compared to many other AI solutions available, contributing to Palantir's impressive financial performance.
During Q3, Palantir's revenue increased by 30% year over year, reaching $726 million. American commercial revenue specifically saw a 54% year-over-year increase. Should this demand continue to expand globally, Palantir's overall revenue growth could accelerate to reach similar levels.
Moreover, Palantir isn't focused solely on growth at the expense of profitability. It boasts a substantial profit margin of 20% in Q3.
These results present a compelling case for investor support. However, if the stock's enthusiasm has already factored in all future growth, it may not be prudent to hold onto it going forward. I fear we have reached this point, as the expectations attached to PLTR's stock are quite lofty.
PLTR's stock is more expensive than Nvidia's has ever been
While 30% revenue growth is commendable, it is not record-breaking. AI pioneer Nvidia regularly reported revenue growth above 200%, and even with its recent deceleration, it is still projected to generate approximately 80% revenue growth during the upcoming quarter.
Despite the slower revenue growth, PLTR's stock is now trading at levels that Nvidia's stock never reached.
Additionally, considering the high expectations now embedded in the stock price, it appears as though PLTR has advanced too far, too quickly.
Suppose the goal for PLTR's stock is to trade at 50 times trailing earnings (still an expensive valuation). Furthermore, let's assume that PLTR continues its 30% revenue growth and maintains its 20% profit margin. At this pace, it will take over six years to attain this valuation.
This assumes a few conditions: First, the stock price remains unchanged, and second, the share count does not increase. Given that PLTR's share count increased by 3.5% over the previous year, this assumption is tenuous and would further lengthen the time required to achieve our target.
In reality, it appears that PLTR has already priced in about 7 years of growth at its current growth rate and profitability level. This is a substantial figure that may not serve investors well. As a result, I recommend investors avoid the stock or at least consider reducing their positions due to the exorbitant valuation. Few stocks (if any) have ever traded for more than 50 times sales or produced satisfactory returns. If PLTR were tripling its revenue like Nvidia did during its peak period, I might not have this same opinion; however, 30% revenue growth may not be sufficient to justify the current valuation.
In light of the high valuation of PLTR's stock, some investors might question whether it's a wise decision to continue investing, given the significant appreciation and lofty expectations. With PLTR's stock trading at levels that Nvidia's never reached, even considering its slower revenue growth, it seems that the stock might have advanced too far, too quickly.
