Palantir Stock At $63: A Reality Check

Palantir Technologies stock (NYSE: PLTR) has had a solid run, rising more than 3.5x since the beginning of the year to about $63 presently.  Several factors have driven this surge, including increasing demand for artificial intelligence (AI) solutions, sizable U.S. government contract wins, and the recent inclusion of Palantir into the S&P 500 index.

However, 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 (HQ) 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 driving PLTR’s performance, and what are the positives and negatives for the stock?

Palantir’s recent financial performance has been strong. Over Q3 revenue rose 30% year-over-year to $726 million while earnings reached $0.10 per share. Margins have also been pretty impressive with GAAP net margins coming in at 20%, while adjusted operating margins stood at 38%. Sales to the government rose 33% to $408 million over the last quarter. Additionally, Palantir has emerged as a “Trump trade” as investors anticipate that a Republican administration under Donald Trump would boost federal spending on national security and immigration.

The U.S. government is Palantir’s largest client and its tools are widely used by agencies including the CIA and NSA and support efforts including terrorist threats, and identifying and deporting illegal immigrants. There a possibility that these areas could see priority under Trump. Palantir’s founders, including Peter Thiel – who was one of the few prominent tech executives who supported Trump during his first term – are also viewed as having considerable influence within the inner circles of the incoming administration. The company’s recent decision to move to the Nasdaq from the NYSE has also helped the stock, as the stock could gain from being added to the Nasdaq 100, which, in turn, could drive up demand from exchange-traded funds.

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, helping with a variety of tasks ranging from optimizing production and managing supply chains. 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.

At the current price level, Palantir stock trades at about 131x consensus earnings for 2025. In terms of revenue, the stock trades at about 40x forward revenue. Consensus pegs revenue growth levels of about 25% for both 2024 and 2025. We believe these are very high multiples, even considering the company’s current growth rates and longer-term prospects. In comparison, cloud data warehousing and analytics player Snowflake trades at about 12x revenues with its growth rates also being quite similar. In fact, AI bellwether Nvidia (NASDAQ:NVDA) stock trades at about 50x estimated earnings for the current fiscal, even though revenues are on track to more than double this year. (Should you Buy, Sell, Or Hold Nvidia Stock?) 

Insider selling in Palantir stock has also been on the rise. Alex Karp, the company’s CEO, has sold close to 40 million shares for a total of $1.9 billion over the last three months alone. 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%?)

[1] Returns as of 11/20/2024
[2] Cumulative total returns since the end of 2016