In the days following Donald Trump’s return to the White House, the stock market has set record highs. While Trump has promised to cut taxes and boost business, he’s also expressed his desire to regulate certain big tech players, and his tariff-based trade policy could affect the artificial intelligence (AI) companies that rely on foreign-made components.
We’ll have a better picture of his economic policy in the coming months. For now, investors appear to believe his administration will ultimately be a friend to the AI market. Palantir (NYSE: PLTR), in particular, saw its stock pop dramatically after Election Day, which was the day after Palantir issued its quarterly earnings.
How much of this is from positive earnings and how much is from the election? I would pin the lion’s share on its earnings. Palantir’s stock was up 23% by market close on Nov. 5, well before we knew who won. That said, the firm certainly could benefit from a Trump presidency, and since the election, the stock is up another 16% as of this writing, so it seems both are at play.
So, with so much momentum behind it, is now the time to buy?
Palantir provides “magical” intelligence
If you’re unfamiliar, the company gets its name from The Lord of The Rings. Palantirs are magical objects that allow their user to see everything happening in real time across huge swaths of land. That is, more or less, what the company does, providing AI-powered intelligence platforms that help companies and government agencies gather information and analyze it.
Though it has been using AI and machine learning for years, recent advancements supercharged its product capabilities, and its sales accelerated.
Palantir just delivered another strong quarter
Palanir’s Q3 numbers were impressive, beating Wall Street’s revenue and earnings per share (EPS) estimates by 3.1% and 10.1%, respectively. It brought in $725 million in revenue for the quarter, up nearly 30% from a year ago, while its EPS rose nearly 43%. Those are impressive numbers. Perhaps more impressive is that the company has delivered that kind of revenue growth for three years now while its operating expenses have stayed relatively flat. Check out this chart showing the two lines diverge.
PLTR Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Palantir’s business appears to be incredibly scalable and, if the trend continues, extremely profitable.
Sales success
Despite the company’s success dealing with the government, the revenue growth this quarter was especially driven by a swelling in its U.S. commercial segment client list. As CEO Alex Karp put it, there is a “U.S.-driven AI revolution that has taken full hold.” The company’s domestic client count rose 77% from a year ago, helping fuel the 54% growth in revenue for the segment. The company expects the trend to continue, setting a year-end target of 50% growth.
The boost in clients and revenue is, in part, due to its unconventional sales strategy. Palantir hosts boot camps to demonstrate the utility of its products to potential customers. This strategy stems from Karp’s belief that its products are so good they sell themselves. The genius here is that these boot camps keep Palantir lean and its profit margins high. Rather than hiring, training, and maintaining permanent sales staff, the boot camps offer a scalable, cost-effective alternative.
Be wary of Palantir’s high valuation
It is clear that Palantir is firing on all cylinders; as Karp puts it, the firm “eviscerated” this last quarter. Palantir is an innovative company with a substantial moat at the forefront of a booming industry. All the components are there. However, even a great company can make a poor investment if it’s too expensive. And Palantir is expensive.
Its price-to-earnings ratio (P/E) exceeds 300. For comparison, Nvidia‘s P/E is 68, already seen as very high, while Alphabet‘s is just 24. Granted, both of these companies are more mature, but Nvidia is actually growing faster than Palantir.
That said, P/E ratios may leave something to be desired. If we want to better account for growth, the price/earnings-to-growth ratio (PEG ratio) is a great metric. Here, you take a company’s P/E and divide it by its growth rate. Anything under 1 tends to be considered fantastic, and more than 2 is not typically ideal. Palantir’s PEG is 2.7. Compare that to Nvidia and Alphabet, which both have a PEG of 1.1.
Valuations aren’t everything; ultimately, a company’s stock is worth whatever someone will pay for it. However, the excessive premium the market has put on Palantir’s stock means it needs to continue executing flawlessly for years to come if its stock is to avoid being dragged down by its valuation. If you are particularly risk-tolerant, Palantir could be an interesting part of your portfolio, but I can’t recommend it at this price for most investors.
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*Stock Advisor returns as of November 11, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
