Palantir (NASDAQ:PLTR) has been the best-performing stock in the S&P 500 both over the past 12 months (up 405%) and on a year-to-date basis (up 73%). The majestic run has been built on the big data firm’s positioning in the AI space and boosted by a series of strong earnings reports.
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However, as this remarkable rally has unfolded, plenty of market watchers have cautioned that despite Palantir’s impressive fundamentals, its valuation has become increasingly stretched.
Among those voicing such concerns is a top investor known by the pseudonym PropNotes, who acknowledges the appeal of Palantir’s AI-driven growth narrative but argues that this does not justify the stock’s lofty current valuation.
“We get it – PLTR is a sticky software company with strong revenue growth potential on the back of this decade’s key technological trend (AI),” says PropNotes who is among the top 1% of all TipRanks’ stock pros. “That said, paying 100x sales for a company appears patently absurd.”
There is little debate that Palantir’s products are highly effective and deliver real value to both commercial and government clients. This comes from the way its platforms fully integrate with customers’ existing technology stacks, enabling detailed data ingestion and more intuitive decision-making.
Yet, despite that solid product-market fit, PropNotes sees several holes in the investment case at this point. Up until mid-2024, Palantir delivered robust growth in both revenue and profitability, thanks largely to improved operational efficiency that turned more of its top-line gains into earnings. But since then, on a trailing twelve-month basis, those gains have begun to lose steam: gross margins have started to contract, and EBITDA and net income margins have been stagnant over several consecutive quarters.
Adding to these concerns is the heavy dilution taking place. “In the case of PLTR,” notes PropNotes, “the company continues to dilute shareholders heavily by subsidizing compensation costs into non-cash items on the company’s financial statements.”
That stock-based compensation has climbed steadily in recent quarters, now approaching three-quarters of a billion dollars – no small figure. Given Palantir is only generating around $570 million in net income, this creates a massive headwind for shareholder appreciation going forward.
Ultimately, however, it is the valuation that PropNotes sees as the greatest red flag. Palantir generated $3.1 billion in revenue over the past twelve months but now sports a market cap of approximately $310 billion.
“Without massive improvements in net margins and incredible continued growth, this price point appears utterly absurd,” warns PropNotes.
In light of all these factors, PropNotes maintains a Strong Sell rating on PLTR shares. (To watch PropNotes’ track record, click here)
The general PLTR view on Wall Street is not quite as harsh, but the bulls are scarce nonetheless; the stock claims a Hold (i.e., Neutral) consensus rating, based on a mix of 9 Holds, 4 Sells and 3 Buys. The forecast calls for a 12-month slide of 19%, considering the average price target stands at $105.29. (See PLTR stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.