In this piece, I evaluated two software stocks, Palantir Technologies (NYSE:PLTR) and Salesforce(NYSE: CRM), using TipRanks’ comparison tool to see which is better. On closer inspection, this indicates a neutral view on Palantir Technologies and a bullish view on Salesforce.
While both companies develop software, Palantir Technologies specializes in big data analytics, while Salesforce focuses on customer relationship management (CRM). Shares of Palantir Technologies are up 25% this year and 48% over the past year. Meanwhile, Salesforce shares are down 14% this year, although they are up 6.5% over the past year.
With such a dramatic difference in the performance of their stock prices, the significant difference in their valuations is no surprise. Below we compare their price-to-earnings (P/E) ratios to gauge their valuations relative to each other and that of their sector.
By comparison, the software industry trades at a price-to-earnings ratio of 50.7x, compared to the three-year average of 61.5x.
Palantir Technologies (NYSE:PLTR)
With a GAAP price-to-earnings ratio of 165.4x, Palantir Technologies trades at a significant premium to its sector and Salesforce. While there is a lot to be said about the company and its exposure to artificial intelligence, the valuation has simply become too high. A neutral position therefore seems appropriate, pending a more attractive entry price.
Importantly, 2023 was the first GAAP profitable year for Palantir, meaning it was profitable under generally accepted accounting principles and thus did not need any adjustments to make it look profitable. The company has benefited immensely from its association with artificial intelligence, as every company with a distant interest in AI has seen its shares explode over the past two years.
While Palantir likely has a long life ahead of it, its valuation is simply too far ahead of itself. As a result, it only takes one questionable metric within the financial results to trigger a sell-off. This makes stocks like Palantir extremely risky because it’s virtually impossible to predict what small detail could trigger a selloff. But even after the post-earnings decline, Palantir shares are still up 25% this year.
For the most recent quarter, Palantir posted adjusted earnings of eight cents per share, in line with consensus, on revenue of $634.3 million, significantly ahead of expectations of $615.4 million. The company even raised its full-year revenue guidance to between $2.677 billion and $2.689 billion.
Palantir also raised its U.S. commercial revenue guidance to more than $661 million, indicating a growth rate of at least 45%. This second piece is critical because investors may have focused on slowing growth in the company’s US commercial segment, where the AI platform is housed.
For context, Palantir reported 40% year-over-year growth for its commercial division in the first quarter, resulting in $150 million in revenue. However, that is a significant decline from the 70% growth rate recorded in the fourth quarter.
Furthermore, total contract value may be the most important financial metric for Palantir. In this area, the company posted a 131% year-over-year increase, outperforming the 107% gain in the fourth quarter. So while things look good for Palantir in the long term, I’d prefer to see a more attractive entry price before diving into the stock.
What is the price target for PLTR stock?
Palantir Technologies has a Hold consensus rating based on two Buys, seven Holds, and three Sell ratings assigned in the last three months. Palantir Technologies’ average price target of $22.11 implies an upside potential of 2.9%.
Salesforce (NYSE:CRM)
With a GAAP price-to-earnings ratio of around 41x after the last earnings release and share price decline, Salesforce is much more fairly valued than Palantir Technologies. It appears the post-earnings sell-off is overdone, as this is an excellent company with staying power. So a bullish view seems appropriate.
Shares of Salesforce sold off in after-hours trading Wednesday after the company’s first revenue loss since 2006, falling from about $270 to less than $230 per share. The company posted adjusted earnings of $2.44 per share on revenue of $9.13 billion, versus expectations of $2.37 per share on revenue of $9.15 billion.
Unfortunately, Salesforce also widely disappointed with its guidance for the current quarter, calling for adjusted earnings of $2.34 to $2.36 per share on revenue of $9.2 billion to $9.25 billion. Analysts had expected adjusted earnings of $2.38 per share for the current quarter on revenue of $9.37 billion.
However, there were some bright spots in Salesforce’s earnings numbers that investors appear to have overlooked in their knee-jerk reaction to dump the stock. The company became much more profitable in the latest quarter as GAAP net income rose to $1.53 billion, or $1.56 per share, compared to $199 million, or 20 cents per share, in the year-ago quarter.
Salesforce also raised its full-year earnings guidance, calling for adjusted earnings between $9.86 and $9.94 per share, up from the previous range of $9.68 to $9.76 per share three months ago. Analysts expected full-year adjusted earnings of $9.76 per share on revenue of $38.08 billion.
What is the price target for CRM stock?
Salesforce has a Moderate Buy consensus rating based on 21 Buy, eight Hold, and zero Sell ratings assigned over the past three months. Salesforce’s average price target, $296.89, implies 31% upside potential.
Conclusion: Neutral on PLTR, bullish on CRM
Once the market fully digests Salesforce’s entire earnings report, I expect the stock to recover, at least somewhat. But even if there’s no immediate recovery, the company’s long-term share price gains over the past five and 10 years show the company has staying power, so CRM’s recent sell-off has made for a compelling buy-the-dip. possibility.
On the other hand, Palantir Technologies is simply overvalued, although at a better entry price I could be persuaded to buy a few shares.
Revelation
