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Five years ago, Palantir Technologies (NASDAQ:PLTR) stock wasn’t actually trading. It wasn’t until September 2020 that the data analytics specialist made its debut on the New York Stock Exchange via a direct listing.
On its first day, Palantir shares opened at $10 and closed at $9.50. Since then, the share price has soared to around $139 as of July. That’s an extraordinary increase of over 1,418% in less than five years.
So how would an investment on IPO day have fared? With the September 2020 exchange rate at roughly $1.29 to the pound, that investment would have equated to about $12,900, enough to purchase 1,290 shares at the $10 listing price.
At today’s price of $139, those shares would now be worth $179,310, or around £131,000 at current exchange rates. Clearly, this is a phenomenal return.
Little room for error
Palantir’s market capitalisation has ballooned from around $17bn at the time of listing to over $330bn today. However, the company’s valuation metrics are challenging.
Palantir currently trades at a price-to-earnings (P/E) ratio of 302, with forward P/E estimates around 245 times. This is far above the information technology sector median. Price-to-sales, price-to-book, and enterprise value-to-EBITDA ratios are all into triple digits.
Despite these lofty multiples, Palantir’s growth has been impressive. Revenues and free cash flow have expanded rapidly, and consensus forecasts suggest earnings will continue to rise at a market-beating pace through 2028.
Yet the company’s profitability is still catching up with its valuation. The rather telling figure is the price-to-earnings-to-growth (PEG) ratio which sits at 7.7. The benchmark for value is typically one. This tells me that Palantir will have to vastly exceed expectations in order to justify the share price.
The bottom line
The market’s clearly betting on Palantir’s dominance in artificial intelligence (AI) and data analytics, as both government and commercial demand for its platforms accelerates.
And it’s worth noting that Wall Street’s repeatedly misjudged Palantir’s prospects. Analysts have maintained an consensus Hold rating over the past three years even as the stock price surged by 1,300%.
But while Palantir’s making strides in the private sphere, it’s worth noting that there are plenty of operational risks here. Firstly, Palantir appears to be benefiting from the current administration, but governments come and go.
Likewise, there are much larger players in the data analytics and software space. With deeper pockets, some analysts believe these companies could truly dominate the market in the AI era.
All of this is important given Palantir’s valuation metrics. It’s so richly valued that any potential investor must consider the risks first. And even the hottest stocks eventually need to justify their price tags with real profits.
However, for an early investor, Palantir’s delivered a life-changing return. Personally, it’s not a stock I’m considering at the moment.
