With its recent addition to the S&P500, Palantir(NYSE:PLTR) is central. Although the company is not new – it was founded in 2003 by Peter Thiel, Stephen Cohen and Alex Karp – recent developments in the field of artificial intelligence (AI) has increased its capabilities. The intelligence company shows that applications of AI in the real world provide real value.
That’s not a small point. While Nvidia is raking in billions of dollars by selling AI hardware to big tech giants like Amazon And AlphabetConcerns have been growing about whether the technology can justify its enormous costs. Palantir is part of a group of companies doing just that.
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The company will report its third-quarter earnings on November 4. The announcement is highly anticipated as investors are keen to see revenue growth continue at a rapid pace. So should you buy Palantir before the market closes on November 4? Let’s first look at some critical factors.
The company’s revenue sources can be divided into two distinct segments: government and commercial. The first is largely how the company made its name. For more than a decade, it has worked with agencies such as the FBI, the Department of Homeland Security (DHS), the National Security Agency (NSA), and Immigration and Customs Enforcement (ICE). This earned the company some pretty negative press, something it still faces today.
At the same time, these contracts have proven to be lucrative. The beauty of working with government intelligence agencies is that because the barriers are so high, you have a built-in moat to protect your business once you break them down. The company has also expanded outside the US, offering its services internationally in Britain, Ukraine, Israel and other countries. There is no shortage of potential customers right now.
The company’s commercial segment is almost as valuable (accounting for about 45% of last quarter’s revenue) and is growing rapidly, largely because its customer base is growing, especially in the US. The company grew its domestic customer base by a whopping 83% year-on-year last quarter, which contributed to 33% year-on-year revenue growth for the segment. And while the company is bringing in more money, it has also cut costs, meaning net revenues are up significantly.
These are the trends that investors want to see. On the fundamentals, Palantir is in an excellent position.
Business fundamentals are important, but you don’t buy the stock in a vacuum. Appreciation also matters, especially when there is a lot of hype involved. By almost any metric, Palantir has one terribly big premium. Are price-earnings ratio (P/E) is currently over 240. For context, Nvidia uses a price-to-earnings ratio of around 60, which is already considered very high. Alphabet’s is only 23.
Okay, but Palantir is in rapid growth mode, right? Don’t the future earnings justify its valuation? Maybe, but even looking at numbers that take the future into account, Palantir’s valuation should still give you pause. The forward price-earnings ratio (the current price compared to expected future earnings) is above 100. That is still almost three times as high as that of Nvidia and five times as high as that of Alphabet. Are PIN ratio – a metric that measures the value of a company rate of growth taken into account – is 2.2 – twice as much as Nvidia and Alphabet.
You can certainly get lost here when looking at various rating metrics; ultimately they are just guides. However, it’s clear that Palantir’s stock is expensive; the market has priced in a lot of growth al. I’m not sure the country can sustain a growth rate that justifies this. Ultimately, even if earnings continue to rise, the stock price won’t keep pace. I would proceed with caution here.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Alphabet, Amazon, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Should You Buy Palantir Stock Ahead of Monday’s News? 2 crucial things investors need to know. was originally published by The Motley Fool
