Palantir's Shares Reach an Record Peak. The "Expert in Evaluation" Shares His Views on This Trend.
If you've been keeping tabs on the AI revolution over the last couple of years, you've probably heard of Palantir Technologies, or better known by its ticker symbol PLTR (-8.04%). Since January, this software giant has seen its shares skyrocket an impressive 550%. Just in 2021 alone, that number climbed an additional 49% as of the latest closing prices.
However, despite the stock's soaring highs, there's one prominent financial figure that remains hesitant about jumping on the Palantir bandwagon. That's none other than Aswath Damodaran, a finance professor at NYU, commonly referred to as the "Dean of Valuation."
Recently, Damodaran sat down for an interview with Scott Galloway, another finance professor at NYU, to discuss his thoughts on Palantir and its stock. When asked about the company, Damodaran was candid, saying that he refrains from valuing Palantir because he doesn't have a clear enough understanding of what the company actually does.
At first glance, Damodaran's comment may seem humorous. But dig a little deeper and his honesty becomes increasingly valuable, especially for potential investors. Let's explore why.
Examining Palantir's Business
When it comes to Palantir's business, there's no denying it's got some major advantages. Revenue and profits are on the rise, and Palantir's forming strategic alliances with some of the biggest names in AI, such as Amazon, Meta Platforms, Microsoft, and Oracle.
But what makes Palantir truly stand out is its innovative approach to unlocking growth in the historically lumpy federal sector business. This has largely been achieved through partnerships with other defense contractors. These strategic relationships have not only jump-started Palantir's growth but have also helped place the company at the center of AI enterprise software.
Palantir's AI software is used for a wide range of purposes, including military operations, supply chain logistics, financial fraud detection, and much more. On some level, Palantir isn't unlike other software platforms in this regard.
Is Palantir Stock a Good Buy Right Now?
A great way to assess Palantir's valuation is to compare it to its peers. As the chart below illustrates, Palantir's price-to-sales (P/S) multiple of 96 is considerably higher than other leading enterprise software platforms, such as Microsoft or Oracle. And the ratio is continually increasing, indicating that investors are buying up the stock due to its momentum.
[PLTR PS Ratio chart]
At first glance, Palantir is an enticing chapter in the broader AI story. But as Damodaran points out, investing in a company like Palantir without fully understanding its business can be risky. Relying solely on momentum or the "greater fool theory" – buying a stock in hopes that someone else will pay an even higher price – can lead to losses if the stock price suddenly falls.
A Valuable Lesson from Damodaran
Damodaran's candidness is a valuable lesson for investors. When evaluating a company, it's essential to do thorough due diligence. If you don't have a solid understanding of a company's business model, then it may be wise to look for opportunities elsewhere.
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Aswath Damodaran, a finance professor at NYU’s Stern School of Business, does not explicitly state his valuation of Palantir Technologies in the provided YouTube video. However, he mentions that he hasn't valued Palantir yet but still sees it as a potential AI leader and a prototype for the premium AI market. This suggests that he views Palantir as a significant player in the AI industry, but he has not yet provided a specific valuation.
Damodaran's hesitation to value Palantir likely stems from the high uncertainty surrounding the company's future growth and market size. This is reflected in the broad potential size of the Total Addressable Market (TAM) that Palantir's software can serve and the level of customer penetration it can achieve, which are significant drivers of the stock's valuation. The uncertainty around these factors makes it challenging to assign a precise valuation to the company.
- Despite Aswath Damodaran's role as the "Dean of Valuation" at NYU, he has not yet valuated Palantir Technologies due to a lack of clarity about the company's business.
- In an interview with another finance professor at NYU, Damodaran expressed his reluctance to invest in Palantir's stock, emphasizing the importance of understanding a company's business before making an investment decision.
- In 2025, some investors might be interested in exploring potential opportunities in Palantir, given its innovative approach to AI and its strategic partnerships with major tech companies.
- To make an informed investment decision regarding Palantir, investors should consider conducting extensive research and due diligence, as suggested by Aswath Damodaran, to ensure a clear understanding of the company's business model and potential future growth.
