Palantir Technologies stock (NASDAQ: PLTR) remains up by over 4x since the beginning of the year, trading at about $74 per share. However, we believe the stock is a high-risk trade at this juncture for a couple of reasons, including its high valuation (over 150x consensus FY’25 earnings), its heavy dependence on government sales, as well as considerable insider selling in the stock. Below, we take a look at what’s been driving Palantir’s stock higher of late, and why it might be prudent to be cautious with the stock at current levels.
What’s Been Driving The Rally?
The first leg of the rally was fueled by the market frenzy surrounding artificial intelligence stocks as well as stronger-than-expected earnings in recent quarters. However, the rally gained momentum after the U.S. elections. In fact, the stock has surged close to 80% since election day. Investors are optimistic that a Donald Trump-led Republican administration will increase federal spending on national security and immigration, driving demand for Palantir’s software tools. Palantir’s co-founder Peter Thiel, was an early Trump ally and he is also seen as holding a lot of influence within the incoming administration. Additionally, Palantir stock was recently added to the Nasdaq-100 following the index’s annual reconstitution. The company moved its stock listing from the NYSE to the Nasdaq in late November, and its inclusion in the Nasdaq-100 has likely boosted demand for the stock from exchange-traded funds. Separately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
What Are The Risks?
Concentration of government sales
There are concerns as well. The concentration on government sales could prove an issue as these contracts are often uncertain and lumpy, making them less predictable. Palantir, too, has indicated that the commercial market represents a bigger opportunity. Palantir’s Foundry platform focused on commercial customers is used in industries including manufacturing, retail, and healthcare. However, commercial performance hasn’t been up to scratch. Commercial-related sales rose 27% to $317 million in Q3 missing consensus estimates, compared to the government side of the business which beat estimates. The company’s ticket sizes are typically large and implementation is also complex and expensive, meaning that the product may not scale well with small and medium-size firms. Palantir faces competition from large and diversified tech companies such as Microsoft, which can cross-sell solutions to their existing customers, as well as from more niche data analytics firms.
The increase in PLTR stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -23% in 2021, -65% in 2022, and 167% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. So what’s the outlook like for the stock?
Palantir’s high valuation
Palantir’s valuation post the rally isn’t justified, in our view. The stock trades at about 48x forward revenue and at more than 150x consensus FY’25 earnings. However, the company’s growth rates are pegged at just about 25% for both 2024 and 2025 per consensus estimates. In comparison, cloud data warehousing and analytics player Snowflake trades at about 12x revenues with its growth rates also being in a similar range. In fact, AI bellwether Nvidia stock trades at just about 30x estimated earnings for the next fiscal, even though revenues are on track to more than double this year, with the consensus projecting over 50% growth for next year. (Should you Buy, Sell, Or Hold Nvidia Stock?)
Considerable insider selling
Insider selling in Palantir stock has also been on the rise. Alex Karp, the company’s CEO, has sold close to 40 million shares over the last few months. Stephen Cohen, a founder and president at Palantir has sold over $90 million in stock. This could be a sign that insiders also believe the stock is fully priced and this could also put pressure on the stock price if more insiders continue selling. The broader economic environment adds another layer of uncertainty. While markets have rallied following the election, the risk of inflation persists amid threats of tariffs and deportation policies. These factors could impact the interest rate environment and, in turn, the valuation of high-growth stocks like Palantir. (S&P To Crash More Than 40%?)
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