A look at Palantir Technologies' latest earnings – and why the stock is overvalued
I've never paid much attention to software company Palantir Technologies (PLTR). A majority of its business involves defense contracts with the U.S. military, so it's all very hush-hush.
But when I read this Barron's article over the weekend, I had to rub my eyes: Palantir's stock is trading at more than 100 times revenue.
It's now one of the top 20 largest companies in the U.S. stock market, with a $440 billion market cap.
The company appears to be riding three waves: artificial intelligence ("AI"), defense spending, and the fact that co-founder and chairman Peter Thiel has connections with President Donald Trump.
The stock is up nearly 2,000% since the company went public in October 2020. And it's up by more than 10 times in just the past year and a half. Take a look:
This is obviously exciting for those invested...
But nearly all stocks should trade on some sort of fundamentals, whether it be revenues, earnings, cash flows, etc.
So let's take a look at Palantir's numbers to see if they justify the current valuation and market cap...
Palantir has had impressive revenue and net income growth over the past year, reaching $3.4 billion and $763 million, respectively:
In the second quarter, revenue grew 48% and profit grew 144%. And the company gave full-year guidance for 45% revenue growth.
The cash-flow statement also looks strong. The company has almost no capital expenditures ("capex"), which is typical for a software business. It has rapidly growing free cash flow ("FCF"), totaling $1.7 billion over the past year:
Palantir's balance sheet is healthy, with a growing net cash position:
The stock is on fire, it's in multiple hot sectors, and the financials look great. So, what's not to like?
In a word: valuation.
Adjusting for net cash, its enterprise value is $438 billion. That makes this maybe the most overvalued large-cap stock I've ever seen...
In this frothy market, anything associated with AI has a ridiculous valuation. So I could easily see the stock trading at 10 times or even 20 times revenues.
But with revenue expected to be $4.2 billion this year, it's trading at 106 times!
To put this in perspective, let's take a look at the forward revenue multiple over the past decade for Nvidia (NVDA), one of the greatest moonshot stocks of all time:
We can see that its peak was "only" 28 times forward revenues – roughly one-fourth of Palantir's valuation today.
Palantir's earnings multiples are even more extreme...
Analysts estimate the company will earn $0.65 per share this year and $0.84 per share next year. (That's 31% growth – not very impressive for a stock like this.)
It closed at $186.96 on Friday. That means it's trading at 288 times this year's earnings and 223 times next year's.
Now, let's compare this with Nvidia's forward price-to-earnings (P/E) multiple over the past decade:
Its peak was 71 times – again, about one-fourth of Palantir's P/E today.
In summary, Palantir is at least 4 times overvalued in my opinion.
That said, I would caution anyone who's thinking of shorting it. Look at what happened to two members of Value Investors Club who pitched it as a short on May 7, 2024 at $21.40 and on January 14, 2025 at $67. (You need to register for free as a guest to read the full posts.) Their analysis was sound... but they got destroyed.
I think it's almost certain the stock will perform poorly going forward, but its enormous market cap will act as an anchor. Once a stock is this disconnected from reality, it could trade at an even higher valuation in the near term.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.