Palantir (NYSE:PLTR) was one of my favorite investments when I bought stocks during the 2022 bear market. The ability to deliver insights by applying artificial intelligence (AI) and machine learning to draw conclusions set the company apart from the SaaS shares.
That became even more true with the release of its Artificial Intelligence Platform (AIP). That product delivers breakthrough productivity gains for its customers.
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Despite these benefits, I decided to relinquish my entire position in Palantir just before the earnings release on November 4. Admittedly, this decision may confuse many growth investors since the share price rose following the Q3 2024 earnings release. Nevertheless, the real question is whether I will stick with this decision in the long run. This is why.
The decision to sell was not easy. My most painful investment lesson involved selling Bookings of holding companies (NASDAQ: BKNG) during the dotcom bust after making quick profits. While the sale seemed like the right decision for years, it has since increased almost a hundredfold from where I sold it. By not holding on to the shares (or at least buying them back), I missed out on what could have been a life-changing gain.
That’s why I now have to wonder if I made the same mistake with Palantir. I bought the stock for an average of $9 per share, which gave me a gain of about 370% when I sold for $42 per share.
The most crucial factor in my decision to sell was the valuation. When I sold, the price-to-earnings ratio was 115, and the price-to-sales ratio (P/S) was 40, and both indicate a very expensive stock in almost every respect. Even though both ratios rose from there, the valuation led me to question whether Palantir stock still offers significant upside in the near term.
With enough growth, I could have forgiven the high multiples, especially with the results reported in the AIP bootcamps. Palantir claimed in the second quarter of 2024 that a supermarket chain went from prototype to paid pilot in 25 days, converting its inventory management and price optimization after the pilot.
Another participant reported that he accomplished more in one day with AIP than a hyperscaler had done in four months. Such eye-popping productivity gains should benefit Palantir’s top line. Still, I felt the portion of the growth going to Palantir wasn’t enough to justify the stock price.
In the first three quarters of 2024, revenue increased 26% to just over $2 billion. Additionally, slow operating expense growth allowed net profit to rise to $383 million in the first nine months of 2024, compared to $116 million in the same period in 2023.
Granted, the release of that data led to a spike in the stock price, which seems to strengthen the argument that I made the wrong decision.
However, despite AIP’s potential, Palantir is on track for a slowdown in growth. Analysts predict sales will grow just 21% in 2025, less than the 26% Palantir has forecast for 2024. Such increases are bullish for Palantir stock, but for me they weren’t enough to justify the company’s valuation.
Thinking back to my lesson on Booking Holdings, I’ll keep Palantir on my watchlist, and to be honest, I still have a bullish view on the stock long-term. Plus, you can’t time the market, which forces me to acknowledge that the sale could end up being a mistake.
Nevertheless, even the most successful stocks of the past 50 years are inclusive Nvidia And Amazonexperienced retracements of more than 50% at points in their history, a risk that could validate my decision to book my profits.
Investors should also consider that Palantir has already experienced a decline of just over 85% in its short history. While I don’t think the stock will drop in late 2022, its valuation raises the possibility of a huge drop in Palantir stock.
Ultimately, I’m still thinking about Booking Holdings’ mistake, so if Palantir’s earnings and sales multiples become more reasonable, it’s very possible I’ll buy back my shares. But because there are more potential disadvantages than advantages in the short term, I’m happy to stay on the sidelines for now.
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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. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Booking Holdings, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Why I Sold All My Palantir Shares was originally published by The Motley Fool
