A Critical Warning for Palantir Investors
As investors, we’re constantly faced with the challenge of separating signal from noise. One stock that’s been flashing a bright red warning signal is Palantir Technologies (NASDAQ: PLTR). Despite its impressive 356% surge in 2024, the company’s stock has become disconnected from its underlying fundamentals.
The Hype Surrounding Palantir
Palantir’s software is undoubtedly impressive, processing vast amounts of information to provide users with real-time insights. Its Artificial Intelligence Platform (AIP) has been a significant growth driver, allowing clients to integrate AI into their business operations. This has led to a 30% year-over-year revenue increase to $726 million in the third quarter, with U.S. commercial revenue rising 54% to $179 million.
The Catch: Limited Customer Base and High Costs
However, there’s a catch. Palantir’s software comes with a hefty price tag, averaging $2.23 million per customer. This limits its customer base to a select few who can afford such an expense. Furthermore, companies can opt for alternative solutions, such as outsourcing AI work to consulting firms or building it in-house.
A Valuation Bubble Waiting to Burst
Palantir’s stock is trading at an astronomical 378 times earnings and 69 times sales. In comparison, even the AI giant Nvidia has never traded above 247 times earnings and 46 times sales. This valuation is unsustainable and has a ton of froth baked into it. Even if Palantir maintains its 30% revenue growth rate for five years and achieves a 30% profit margin, its stock would still trade at 60 times earnings – a very expensive price tag.
Time to Take Profits and Reassess
Given the disconnect between Palantir’s stock price and its underlying fundamentals, it’s time for investors to take their profits and reassess their investment strategy. With Wall Street analysts expecting only 24% revenue growth next year, the stock’s valuation is likely to correct in 2025.
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