Palantir At All-Time Highs: Time To Take Profits

Summary:

• Palantir has been riding high for several years due to the AI hype that has benefitted the entire U.S. tech sector.
• It currently trades at multiples similar to those of NVIDIA (121 times earnings, 34.5 times sales), but without that company’s growth rates.
• PLTR’s 22% revenue growth rate puts it squarely in the ‘growth stock’ category, but this isn’t the kind of growth that justifies 35X sales.
• The company has made progress on some issues it faced in the past; for example, it has slowed down the rate of SBC/dilution.
• In this article, I explain why I think Palantir holders should use this all-time high as an opportunity to take profits.

Palantir (NYSE:PLTR) has become one of the most richly valued large-cap stocks in the entire market. Trading at a full 34.5 times sales, it’s valued much like NVIDIA (NVDA), but with only a small fraction of that company’s growth. Over the last three years, Palantir has compounded its revenue at a 23% CAGR, with its free cash flow growing at a similar rate. This is definitely a growth stock, but if you look at its multiples, you will see that they meet or even exceed those of NVIDIA, when Palantir isn’t growing at rates anywhere near that company’s.

Palantir – multiples Adjusted P/E – 121 GAAP P/E – 229 Price/sales – 34.5 Price/cash flow – 122.95	NVIDIA – multiples Adjusted P/E – 60 GAAP P/E – 62 Price/sales – 33.99 Price/cash flow – 48.73
Palantir – y/y growth rates Revenue – 21.2% Earnings – non-meaningful Free cash flow – 79.5% Operating cash flow – 75.6%	NVIDIA – y/y growth rates Revenue – 194% Earnings – 414% Free cash flow – 239% Operating cash flow – 309%

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As you can see, NVIDIA has much lower multiples and much higher growth rates than Palantir does, despite being a larger company whose scale should theoretically make growth harder for it.

Now, you might wonder why I’m comparing Palantir and NVIDIA here. Palantir is a big data company, NVIDIA is a chip company – where’s the basis for comparison?

In fact, the two companies are more similar than they appear to be.

Palantir and NVIDIA are both essentially in the big data industry. Palantir has always been a big data/analytics company, while NVIDIA has become one recently. NVIDIA was originally in the gaming industry, but ever since its pivot to AI accelerator chips, it has been an AI chip company. Generative AI is a subset of big data (it works off of autoregressive models similar to those used in data analysis).

Also, NVIDIA isn’t “just” a chipmaker. Its chips come with a computing platform/programming model called CUDA that helps optimize tasks performed by its GPUs. CUDA allows developers to program their GPU to do specific tasks, such as running AI models or doing complex mathematical operations. Among the functions developers can program with CUDA are data retrieval and analysis functions like those performed by Palantir’s Gotham and Foundry. So, there is more in common between Palantir and NVIDIA than meets the eye.

In light of these similarities, Palantir’s valuation looks stretched, to put it mildly. It has higher multiples than the entire Magnificent 7 save for Tesla (TSLA), which has a higher forward PEG ratio than Palantir does (most of Palantir’s other multiples are higher than Tesla’s). This is significant because the Magnificent 7 as a group are already quite pricey at 35X earnings.

When I last covered Palantir, I rated the stock a hold because its stock-based compensation (a long-term concern among shareholders) had been slowing down, and it had just become profitable. The company’s SBC is still growing more slowly than in the post-IPO period, and it was profitable in its most recent quarter. Unfortunately, PLTR stock is now outrageously overvalued, to the point that shareholders need to seriously consider taking profits. In this article, I will explain in more detail why I feel that way.

Palantir – Competitive Landscape

Before exploring Palantir’s valuation, I need to take a look at the company’s competitive position. A major factor in determining whether a richly valued growth company is worth its steep price tag is whether it can keep up its growth; the said company’s competitive position determines whether that’s the case.

So, how strong is Palantir’s competitive position?

Within the big data software niche, Palantir has a fairly strong competitive position, but not an unassailable one. Morningstar (MORN) gives the company a narrow moat rating, which I mostly agree with. It has several serious competitors. However, Palantir’s business is broken down into government and commercial segments, and its position within government is much stronger than its position in commercial. Palantir Gotham is one of just a handful of big data platforms custom-made for military, intelligence and law enforcement use cases. In Palantir’s commercial segment, it faces more competition. Some notable competitors include:

• Booz Allen Hamilton (BAH), which implements data platforms for the military sector.

• Splunk, Tableau and Alteryx in the commercial segment.

• Large enterprise companies like IBM (IBM) and SAS, whose diversified offerings sometimes overlap with Palantir’s.

Without a doubt, Palantir has a significant number of competitors. As for these competitors making life difficult for Palantir, there are at least some signs that that’s happening. For example, in 2022, the company lost a lucrative contract with ICE to a solution that was jointly developed by several companies.

Valuation

Basically, Palantir’s competitive position is good but not untouchable. The company can and does lose business to competitors from time to time.

Given this, its steep valuation appears hard to justify. As mentioned at the start of this article, Palantir trades at even higher multiples than NVIDIA, which is often considered a monopoly in high-end AI accelerator chips and related software. NVDA has the edge over PLTR in both competitive strength and growth, yet it is cheaper. That’s a peculiar fact.

Palantir’s valuation also looks questionable, going by discounted cash flows. The stock is so expensive now that you can have scenarios with very high growth for very long periods of time, that nevertheless show PLTR stock having downside. The following are some such scenarios that meet that description, using $0.32 in FCF per share as the base amount:

SCENARIO	COMPUTED FAIR VALUE
15% FCF growth for 5 years, followed by 5% growth in perpetuity 10% discount rate	$10.22
15% FCF growth for 5 years, followed by 5% growth in perpetuity 7% discount rate	$26.09
20% FCF growth for 5 years, followed by 0% growth afterward, 10% discount rate	$7.04
20% FCF growth for 5 years, followed by 0% growth afterward, 5% discount rate	$14.91
20% FCF growth for 10 years, followed by 0% growth afterward, 10% discount rate	$12.97
20% FCF growth for 10 years, followed by 4% growth afterward, 10% discount rate	$18.57
25% FCF growth for 10 years, followed by 1% per year afterward, 6% discount rate	$42.46

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All of these scenarios involve very high-growth rates for very long periods of time, yet fail to justify Palantir’s stock price. At the time of this writing, PLTR stock was trading for $43. The final scenario in the table above, which involves an extremely long period of very high growth followed by modest perpetual growth and a fairly low discount rate, comes in $0.54 short of Palantir’s actual price! So the amount of future growth that Palantir has to do to justify its current price tag is nothing short of extraordinary, and the company must do so while facing considerable competition.

The Bottom Line

Palantir is clearly a fast-growing company that merits above-average multiples. But does it really justify multiples that put the likes of NVIDIA to shame? NVIDIA is more profitable, faster-growing and more dominant than Palantir, yet the latter company has a steeper valuation. This peer comparison does not flatter Palantir. It’s also very difficult to come up with cash flow scenarios that justify Palantir’s current market price, unless you assume that the company can grow at extraordinarily high rates forever. There’s just too much going against this stock at this price. Investors would do well to take some profits.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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