The AI Company's Shares Surged Post-Trump Election Victory, Raising the Question of It being a Wise Investment Opportunity.
After Donald Trump's re-election to the White House, the stock market reached new heights. Trump has announced plans to cut taxes and encourage business growth, but he also expressed intentions to regulate certain tech giants and implement tariff-based trade policies, which could impact AI companies reliant on foreign components.
The AI market appears to be optimistic about Trump's presidency. For instance, Palantir's stock experienced a significant surge after the election, drastically increasing by 23% by market close on Nov. 5, before the election result was known. While the positive earnings reported by Palantir contributed to its growth, the election result also played a role in the stock's surge, as it could potentially benefit from a Trump administration.
So, with such momentum, is now the right time to invest in Palantir?
Palantir harnesses "supernatural" intelligence
Perhaps you're not familiar with the company, but it draws its name from J.R.R. Tolkien's "The Lord of the Rings." Palantirs are magical objects that grant their user real-time, panoramic insight across vast territories. This is essentially what Palantir does, providing AI-enhanced intelligence systems that enable companies and government agencies to collect and analyze data.
Although it has been using AI and machine learning for years, recent advancements have bolstered its product capabilities, resulting in accelerated sales.
Palantir delivers another robust quarter
Palantir's Q3 financials were impressive, outperforming Wall Street's revenue and EPS estimates by 3.1% and 10.1%, respectively. Its Q3 revenue amounted to $725 million, representing a near 30% increase from the previous year, while its EPS surged by nearly 43%. These are noteworthy figures. What's even more impressive is that the company has managed this revenue growth for three consecutive years, all while maintaining relatively stable operational expenses. Refer to the graph showing the two lines diverge.
Palantir's business shows remarkable scalability and, if the trend continues, immense profitability.
Revenue growth
Despite its success with government projects, Q3's revenue surge was predominantly driven by the expansion of its U.S. commercial clientele. As CEO Alex Karp put it, a "U.S.-led AI revolution" has taken hold. Palantir's U.S. client count increased by 77% from the previous year, contributing to the 54% revenue growth in the segment. The company anticipates this trend to persist, setting an end-of-year target of 50% growth.
The surge in clients and revenue can be partially attributed to Palantir's unconventional sales strategy. It conducts boot camps to demonstrate the utility of its products to potential customers. This strategy stems from Karp's belief that its products sell themselves. The advantage lies in the fact that these boot camps maintain Palantir's lean structure and high profit margins, as it avoids hiring, training, and maintaining a permanent sales team.
Caution is advised with Palantir's hefty valuation
It's undeniable that Palantir is thriving; as Karp puts it, the company "devastated" its last quarter. Palantir is a groundbreaking company with a substantial competitive advantage at the forefront of a burgeoning industry. However, even a top-tier company can struggle as an investment if it's overpriced. And Palantir certainly falls into that category.
Its P/E ratio exceeds 300. In contrast, Nvidia's P/E is 68, already deemed excessive, while Alphabet's is a mere 24. Granted, both Nvidia and Alphabet are more mature companies, but Nvidia is even growing faster than Palantir.
Still, P/E ratios may be somewhat misleading. If we desire a better approximation of growth, the PEG ratio is a great alternative. By dividing a company's P/E by its growth rate, anything below 1 is generally considered exceptional, while values above 2 are not typically ideal. Palantir's PEG is 2.7. Compared to Nvidia and Alphabet, which both have a PEG of 1.1.
Valuations are not an infallible determinant of a company's stock value; ultimately, a stock is worth whatever someone is willing to pay for it. Nevertheless, the significant premium the market has placed on Palantir's stock means it must maintain exceptional performance for an extended period to avoid being weighed down by its valuation. If you're particularly risk-tolerant, Palantir could be an attractive addition to your portfolio, but I cannot recommend it at its current price for most investors.
Given Palantir's impressive Q3 financials, with a 30% revenue increase and a P/E ratio exceeding 300, some investors might consider investing in the company. However, the high valuation requires Palantir to maintain outstanding performance to avoid being burdened by its price tag. Furthermore, with the potential impact of Trump's administration on AI companies and foreign components, careful consideration of the financial and political landscape is essential before making an investing decision.
