Should Investing in Palantir be Considered?
This year, the scorching hot investment has been Palantir (PLTR 1.71%). Its impressive earnings and inclusion in the S&P 500 have contributed to its stock soaring an staggering 250% this year.
Despite its stellar performance, many investors are pondering whether it's still a wise investment given its significant gains. Let's delve deeper into the buying and selling arguments regarding Palantir stock to help you make an informed decision.
The growth trajectory boosts the bullish argument for Palantir
Palantir has established itself as a prominent player in the global data collection and analytics industry, much thanks to its collaboration with the U.S. government for critical tasks like combating terrorism and tracking COVID-19 cases. However, the real drivers behind its optimistic outlook are its advanced Artificial Intelligence Platform (AIP) and its expansion into the commercial sector.
The company's US commercial revenue has experienced exponential growth in recent quarters, as more and more businesses express interest in its AI platform and the multifaceted applications it offers across different industries. In the last quarter, Palantir's US commercial revenue skyrocketed by 54% to reach $179 million, with AIP recording "unstoppable AI demand" from these new customers. The US commercial customer count grew by 77% year over year, while its total contract value (TCV) surged by 37% to almost $300 million.
Moreover, Palantir has experienced accelerating growth with its biggest client, the US government, which is beginning to embrace its AI solutions. US government revenue increased by 40% last quarter to hit $320 million. The company stated that every part of the government, including the White House, Congress, Defense, and Intelligence agencies, is starting to adopt the utilization of large language models (LLMs).
The biggest opportunity for Palantir lies in transitioning its customers from AI prototype projects to full production. Currently, the company is securing a substantial number of new customers, but the true potential lies in expanding within existing customers. Palantir has an impressive net dollar retention rate of 118%, which measures revenue earned from clients who have been with the company for more than a year, excluding any customer attrition. This percentage does not account for the revenue generated from customers acquired within the past year, which is where the most significant growth potential lies. Palantir has landed numerous new AI customers in the last 12 months for prototype projects, and capitalizing on these newer clients will significantly boost its revenue growth prospects.
Valuation and executive selling constitute the bearish case for Palantir
While Palantir has proven itself to be a formidable company, whether its stock is a good investment is another question entirely. Valuation plays a crucial role in this matter.
At present, Palantir's stock is trading at a forward price-to-sales (P/S) ratio of approximately 40 times next year's projected earnings by analysts. After accounting for its net cash, it still trades at around 39 times using an enterprise value to sales multiple (EV/S). During the peak of software-as-a-service (SaaS) valuations, SaaS stocks averaged a 19.4 EV/S multiple while expanding revenue at a rate of just below 30%, which is similar to Palantir's growth rate in the last quarter.
Furthermore, Palantir executives and other insiders seem aware of the stock's lofty valuation, with several of them selling shares in recent times. CEO Alex Karp has been a consistent seller of Palantir stock in the past, but his sales have increased significantly since September. Over the past few months, he has exercised options and sold shares on four separate occasions, pocketing more than $1.6 billion by doing so. Peter Thiel, the company's chairman, sold over $1 billion in shares in September and October, while other top executives and shareholders have also unloaded their holdings.
Conclusion
Regarding Palantir, I recommend following in the footsteps of the company's executives. It's an exceptional company, but its valuation is currently double the peak SaaS valuations from just a few years ago, with similar growth rates.
As such, I would not advise pursuing new investments in the stock, and seasoned investors should consider offloading some of their shares following a remarkable run.
Given the impressive growth Palantir has seen in its commercial sector and US government revenue, some investors might consider further investing in the company. The surge in US commercial revenue, driven by interest in its AI platform and the multifaceted applications it offers, suggests potential for continued growth.
However, it's important to consider the high valuation of Palantir's stock. With a forward price-to-sales ratio of around 40 times next year's projected earnings and insiders like CEO Alex Karp and chairman Peter Thiel selling their shares, some financial analysts may argue that now might not be the best time for new investing or even selling some shares, especially considering that SaaS stocks from a few years ago had similar growth rates but lower valuations.
