Financial Institutions Issue Cautions to Shareholders Regarding Palantir's Shares
Over the past three months, few investments have been more profitable than Palantir Technologies (PLTR, up 4.46%). This tech giant's stock more than doubled during this period, surpassing both market indexes and leading competitors. This impressive performance can be attributed to several factors, such as Palantir's entry into the S&P 500 in September and its impressive Q3 earnings results.
However, Palantir's meteoric rise has left some investors and analysts divided. Many artificial intelligence (AI) investors view Palantir as the software equivalent of Nvidia (leader in the hardware side of AI investments). However, Wall Street analysts are less enthusiastic about the stock, with a one-year average price target of $36.70 from 22 analysts, according to the Wall Street Journal. This target represents a near 40% decline from the current price, which suggests a significant disparity between market expectations and analyst outlooks. Should investors heed this warning sign, or are the analysts misguided?
U.S. growth fuels Palantir's success
Palantir established itself as a leader in AI solutions for its clients, offering customized models. Originally focused on government clients, Palantir expanded into the commercial sector, where revenue growth has been particularly strong. As of Q3, government revenue accounted for 56% of Palantir's total revenue, while a growing 57% of its revenue came from the U.S. market.
Palantir's software is in high demand globally, with numerous governments and businesses using it worldwide. The U.S. is the primary source of Palantir's growth.
| Sector | U.S. Growth | Total Growth | U.S. Revenue Share ||-------------|---------------|-------------|---------------------|| Commercial | 54% | 27% | 57% || Government | 40% | 33% | 78% |
Commercial
These impressive growth figures have bolstered investor confidence, with many believing that the U.S. momentum could translate into global revenue growth.
54%
Furthermore, Palantir has demonstrated a commendable balance between aggressive growth and profitability. With a third-quarter profit margin, Palantir's management reinforces their commitment to generating revenue and maintaining a strong financial position.
27%
However, despite these strong results, there is still debate over whether Palantir's business fundamentals can meet the lofty expectations built into its stock price.
57%
Sky-high expectations overshadow Palantir's growth
Comparing Palantir to Nvidia may be misleading, as Palantir is unable to deliver the same growth rates as Nvidia did when it saw multiple quarters of revenue tripling. While 30% year-over-year revenue growth is impressive, it falls far short of what Nvidia provided investors.
Government
It is unlikely that Palantir will reach such heights, given the high level of competition it faces. Palantir competes with companies that can develop AI solutions in-house, consulting firms with strong client relationships, and competitors with pre-built solutions for a wide range of use cases.
40%
Moreover, Palantir's product remains out of reach for small businesses. The company has just 321 U.S. commercial clients, with average annual spending of $2.23 million each. The pool of businesses capable of such significant software investments is limited, thus restricting Palantir's potential market.
33%
Lastly, Palantir's valuation has hit astronomical levels. Following its earnings-driven surge, the stock now trades for 53 times sales.
78%
A valuation of 53 times earnings is extremely high, likely leading to long-term problems for the stock.
Suppose Palantir can achieve a price-to-earnings ratio of 45 when fully mature and a 30% profit margin, similar to other leading software companies. Then, it would need to maintain its current revenue growth rate of 30% for the next five years merely to break even.
To grow at a market-beating pace, Palantir would need to perform even better, which is a challenging task to maintain over such an extended period.
Palantir is an extraordinary company leading the AI revolution, but investor expectations may be unreasonable. It is advisable to steer clear of the stock and explore alternative investment opportunities.
In light of Palantir's impressive U.S. growth and strong performance in the commercial sector, many investors are considering it as a promising opportunity for money investment. However, Palantir's high valuation and intense competition in the AI market have left some analysts skeptical, with concerns about whether the company can meet the lofty expectations set by its current stock price.
Despite Palantir's entry into the S&P 500 and impressive Q3 earnings results, the company's valuation currently stands at 53 times sales, which is extremely high and could potentially lead to long-term problems for the stock. This high valuation could require Palantir to maintain its current revenue growth rate for several years to break even, making it a risky investment for some finance enthusiasts.
