Palantir (PLTR) continues to grow rapidly and make very impressive, lucrative deals. But its valuation remains extremely steep, multiple experts are suggesting that the shares are overvalued, and the company faces very tough competition that could intensify meaningfully going forward.
What’s more, its CEO has sold significant amounts of PLTR stock, so even he may think that the stock’s advance is overdone and that the shares pose meaningful risk at this point.
Given the risks posed by the stock’s valuation, I recommend that investors avoid exposure to the shares.
Impressive, Lucrative Deals and rapid growth
On December 10, PLTR announced that, in a deal worth as much as $448 million, the U.S. Navy would “deploy Palantir’s Foundry and Artificial Intelligence Platform (AIP) across the nation’s Maritime Industrial Base.” Under the agreement, Palantir will reportedly” manage the supply chain of (the Navy’s) nuclear submarine fleet.
Last month, the company disclosed that FTAI Aviation (FTAI), which specializes in aircraft engine maintenance, would utilize PLTR’s “Artificial Intelligence Platform (“AIP”) across FTAI’s global maintenance footprint.” Finally, also in November, PLTR announced that it would launch a joint venture related to bringing AI” to strategic commercial sectors across the UAE.”
In the third quarter, the company’s revenue soared 63% versus the same period a year earlier to $1.18 billion. Given Palantir’s recent deals, it is likely to keep generating very high levels of growth in the near-to-medium term.
Extremely High Valuation and Experts’ Skepticism
As DHI (DHI) CEO Art Zeile pointed out in a column published last month, “Apple’s (AAPL) peak P/E ratio in the post–dot-com era (was) about 100x.” Palantir’s trailing P/E ratio, on the other hand, is now 423x. In a different column, Zeile, who “is a defense industry expert with over 35 years of experience,” called Palantir’s valuation “enormous” and warned that ” its high valuation may lead some to look for alternative ways to buy into the trend of defense and security agencies’ increasing demand for AI tools.” (DHI owns ClearanceJobs).
And multibillionaire investor Michael Burry, who predicted the mortgage crisis of 2008 early on, compared PLTR to DiamondCluster, a dot-com-bust-era company whose shares sank from $100 in March 2000 to single digits in Q3 of 2005.
Finally, Wall Street analysts have an average rating of Hold on PLTR stock, indicating that they’re not very upbeat on the name’s outlook.
Tough Competition That Could Intensify Further and the CEO’s Stock Sales
As Zeile pointed out, Palantir has several major competitors, including heavy weights like IBM (IBM), ServiceNow (NOW), and Booz Allen (BAH).
And a significant number of smaller competitors may emerge and start to chip away at Palantir’s market share. What gave me the latter idea was TheStreet’s recent profile of Govini which the publication referred to as “an emerging defense tech software startup.” Led by CEO Tara Murphy Dougherty, a Palantir alumnus, Govini is generating annual recurring revenue of over $100 million and recently obtained “a…$900 million U.S. government contract, along with multiple deals with the Department of War.” Over time, many more small but nimble and hungry firms like Govini could emerge in Palantir’s sector.
Last month, Palantir CEO Alex Karp gave notice that he planned to unload 585,000 shares of the company valued at nearly $96 million at the time. In August, he dropped around $62.7 million of the shares. Stephen Cohen, the president and a co-founder of the firm, unloaded nearly 348,000 shares with a value of $56.7 million last month.
the Bottom Line on PLTR
If Palantir does stumble significantly due to intensifying competition or for any other reason, the shares are likely to tumble tremendously, given their extremely stretched valuation. That’s probably why Karp and Cohen, even if they are rather confident in the firm’s outlook, are taking some hefty profits now.
Meanwhile, it’s difficult to see how the stock, which is already so expensive, could jump a great deal anytime soon.
Investors should look for names with much better risk-reward ratios.
*This article is intended to be informational only; it is not financial advice.
