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Investing £10,000 in Palantir Technologies (NASDAQ:PLTR) stock two years ago would have been an extraordinary financial decision. Over that period, the stock has surged by an astonishing 858% in US dollar terms.
To put this into perspective, an initial £10,000 investment would have grown to approximately £95,800 before considering changes in the exchange rate between the pound and the dollar.
However, the British pound has strengthened against the US dollar during this timeframe, moving from an exchange rate of £1 = $1.28 to £1 = $1.37. When factoring in this currency appreciation, the value of the investment, when converted back to pounds, would be around £89,530.
This means that despite the pound’s strengthening, the investment still yielded a remarkable return, nearly multiplying almost ninefold.
It’s all about AI
The hype surrounding Palantir is rooted in artificial intelligence (AI). At its core, Palantir is a data analytics and AI company that specialises in transforming vast amounts of complex data into actionable insights.
Its technology is widely used by government agencies, including defense and intelligence sectors. This gives it a reputation for reliability and strategic importance. Beyond government contracts, Palantir has aggressively expanded into commercial markets, offering its data platforms to industries ranging from healthcare to finance.
This dual-market approach has fuelled optimism about its growth potential. Furthermore, Palantir’s origin story, co-founded by Peter Thiel, is shrouded in a degree of secrecy. This has added to its allure, creating a narrative of a cutting-edge tech company solving some of the world’s most challenging problems.
Valuation is… demanding
Despite the impressive stock performance and the hype, Palantir’s valuation metrics are bonkers. The company’s price-to-earnings (P/E) ratios, both trailing and forward-looking, are extraordinarily high compared to the technology sector median.
The forward non-GAAP P/E ratio stands at approximately 248, while the sector median is just under 24. This means Palantir is trading at more than 10 times the typical valuation of its peers. Other valuation measures, such as price-to-sales (P/S) and enterprise value to sales ratios, are similarly stretched. Palantir’s P/S ratio exceeding 100 compared to a sector median of around three.
Growth-adjusted metrics are still concerning. Palantir’s forward price-to-earnings-to-growth (PEG) ratio stands at 7.99, compared to the technology sector average of just 1.8. This means Palantir is valued at over four times the sector average relative to its expected earnings growth, highlighting how investors are paying a significant premium for its future prospects compared to typical tech companies.
The bottom line
While Palantir could prove to be a dominant player in a world where AI is even more prevalent than it is today, the company’s current valuation suggests that investors are betting heavily on its future growth. This introduces a huge amount of execution risk. Personally, it’s not a risk I’m willing to take. By investing in companies with less demanding valuation metrics, I’m protecting myself against losses. It may be worth considering at a cheaper valuation.
