Palantir (NASDAQ:PLTR) stock is known for its lofty valuation, but to grasp just how extreme it has become, consider this: last year’s share dilution alone added more market value than the entire worth of many software companies.
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That dilution isn’t minor. Over the past year, the AI big data firm issued an additional 148 million shares, pushing its diluted share count to 2.56 billion. In effect, this added roughly $28 billion in market value, despite Palantir only being projected to generate $4.15 billion in revenue this year. Put differently, the value created purely from stock options and RSUs granted to executives and top talent is about seven times the revenue target, surpassing even the price-to-sales ratio of a heavyweight like Salesforce.
It’s precisely this dynamic that top investor Stone Fox Capital (SFC) warns about.
“At over 100x sales, Palantir’s stock price reflects excessive optimism, making it a dangerous bet for investors despite strong recent results,” says SFC, who is ranked among the top 3% of stock experts on TipRanks.
That warning comes even as Palantir continues to post impressive growth. In Q2, revenue climbed 48% year-over-year, surpassing $1 billion for the first time, with U.S. commercial sales soaring an impressive 93%. Still, that segment brought in only $306 million in the quarter. SFC argues this kind of growth looks spectacular because the company is still in the “AI startup phase” – and as Palantir scales into the $5 billion to $10 billion range, the pace of growth will inevitably slow.
For further perspective, SFC points out that Palantir’s stock has rocketed 1,870% over the past five years, even though revenue rose just 244% over the same period.
The main takeaway for investors is that holding this stock carries significant risk. Any setback could wipe out more than 75% of the stock’s value, and doubts would remain about whether Palantir would be an attractive buy at a market cap exceeding $100 billion, reminiscent of Microsoft’s lost decade (Microsoft investors who bought at the $60 peak in 2000 ended up losing half of their investment by the end of 2013, and were even down by 75% during the financial crisis lows circa 2008/09).
To be clear, the investor doesn’t rule out further upside. In fact, SFC concedes Palantir could still climb toward $200 a share, potentially pushing its market cap near $1 trillion. Still, delving in here is tantamount to playing with fire.
“Palantir is likely to continue reporting accelerating growth for a period, and the market tends to remain bullish in those scenarios, but the downside risk only grows with any gains from here,” the investor summed up, rating PLTR shares a Strong Sell. (To watch Stone Fox Capital’s track record, click here)
Wall Street overall is less severe but hardly optimistic. Based on 13 Holds, 5 Buys, and 2 Sells, the analyst consensus calls Palantir a Hold (i.e., Neutral), with an average target of $154.56, implying a ~13% drop over the next year. (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.