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It has been an incredible few years for shareholders in Palantir (NASDAQ: PLTR). It went public in 2020 at $10 a share, ending its first trading day below that price. Since then, Palantir stock has surged 817% — including 272% over the past year alone.
Does that mean the stock might be a bubble – or could things get even better from here? Should I consider adding the firm to my portfolio?
Strong business performance may power on
The price has surged but in part that reflects a booming business. Since its last full year before listing (2019), Palantir has grown revenues by 285%.
What was an operating loss of over half a billion dollars back then had turned into an operating profit north of $300m by last year.
The bottom line was even better: last year saw a net income of $462m, compared to a net loss of $588m back in 2019.
It is easy to point to radical shifts in the global security environment and expanded government in many countries over the past five years as a reason for that dramatic shift in Palantir’s numbers.
But that misses a couple of key points.
Palantir chose what markets to target strategically not by accident – and it has made good choices.
Secondly, while revenues have soared, the income trend looks even more impressive to me. That underlines the scaleable nature of Palantir’s business model, which means income could well grow much quicker than revenues.
The current valuation is hard to justify
Still, even if revenues do keep growing strongly and earnings even more so, can Palantir justify the valuation the stock market is putting on it?
At the moment, the tech company’s market capitalisation is a tad short of $200bn. So Palantir is trading on a price-to-earnings ratio of 442. Even its price-to-sales ratio is around 73.
Clearly, the market is building in very high expectations of growth for Palantir. Very high expectations.
I do not think such a price can really account for the risks Palantir faces, from rapidly evolving competitors to the uncertain spending priorities of key US government departments that use Palantir as a provider.
But even stepping aside from such risks (which I do not do as an investor) I think the valuation makes no sense.
It seems to presume that Palantir is going to grow at light speed. Yes, it is growing fast but we know from long experience of economic activity that as companies grow it is typically difficult for them to maintain their early rates of growth.
Selling for over 70 times sales strikes me as irrational. I see no value investing at such a price (but lots of risk) and reckon that even if Palantir’s business performs well, that price could mean the share falls rather than rises from here.
I have no plans to invest.
