Palantir (PLTR) Pre-earnings Analysis
The cult-like army of Palantir is not going to like this analysis, but here it goes. If there is a bubble in the market, Palantir is one of its leaders. This company is a perfect example of investors buying into a story that has yet to take place, hoping it will be “different this time”. And although Palantir can continue rallying higher based on this story, it will eventually meet a day where investors turn their backs.
Looking at Palantir as a business, the company is well managed and is growing in a low to mid double digit percentage rate. Revenue increased 39% last quarter and 36% before it. And net income has seem steady growth to about a 25% margin after taxes, leaving them with $214 million in net income last quarter. This puts Palantir at a price to earnings ratio of 691x over the past twelve months, significantly higher than the S&P 500’s average of 30x (which is high on its own). Even when accounting for Palantir’s projected earnings over the next twelve months, the company’s forward P/E still sits at a whopping 368x.
So, what gives? Why is Palantir trading at a such a high valuation…this is likely because of their ties with the U.S. government, specifically the Department of Defense. Rising military and defense budgets have landed Palantir some expensive contracts and investors are buying hopes that these contracts will keep on coming. While that may be a good play for some companies at certain valuations, when a stock climbs far past reasonable expectations, it can be met with strong disappointment if that expectations fall through. Palantir’s expansion to commercial markets also has its investors buying, in hopes of deals in healthcare, manufacturing, energy, and finance.
Based on current numbers, Palantir’s revenue is only set to increase to $6.5 billion by 2027, still leaving them at a very high price to sales ratio. The company’s expansion efforts and additional contracts can help offset the worries, but investors buying at this price must recognize they’re buying an extremely expensive business.
Earnings this week:
Despite the expensive valuation, we’ve seen markets do crazy things. Palantir may be expensive by definition, but never underestimate the market’s greed. The stock could continue climbing on hopes that the company’s backlog will grow to infinity, making short term movement unpredictable, but over a long timeline, Palantir is likely to face a deep correction.
The option’s market is projecting a move of (+/-) $19 by August 8th.