Palantir Technologies (NYSE:PLTR) shares are down around 5% during the final five days of the first quarter of 2024, providing fuel for those investors who have long deemed the stock fundamentally overvalued. This sentiment was echoed by analysts at Monness, Crespi, and Hardt, who downgraded PLTR from Neutral to Sell, critiquing its valuation as excessively high and predicting a further decrease to $20 per share within the next 12 months—a potential 18% drop.
The skepticism surrounding Palantir’s valuation is justified, given its current trading at 143 times earnings after the stock’s 190% run higher. It’s reasonable for investors who entered at PLTR’s near-penny stock levels to lock in profits and pat themselves on the back for a great trade.
Passive investors considering purchasing PLTR for their long-term portfolio will likely look at the lofty valuation and pass on owning shares. But this might be a mistake as Palantir’s high valuation comes with a compelling growth story. Investors willing to navigate through the company’s volatility might find Palantir a worthwhile addition to their portfolio.
Growth Now, Earnings Later
Palantir’s strategic moves since its public debut in 2020 has been aimed at diversifying its client base by focusing on the commercial sector. Initially, there was investor criticism against its heavy reliance on government contracts.
However, the recent increase in its commercial customer count by 55% and a 32% growth in revenue from this segment highlight Palantir’s successful expansion beyond its government clientele. This surge is partly attributed to the effectiveness of the company’s AIP bootcamps, which offer potential clients a hands-on experience with its AIP platform, suggesting that Palantir’s strategies to bolster its commercial presence are paying off.
Meanwhile, Palantir’s government sector business continues to flourish, underscored by a recent $178 million contract from the U.S. Army for its TITAN program. This balance between expanding its commercial footprint while sustaining growth in government contracts solidifies Palantir’s business model and ability to listen to and address investor concerns.
Despite criticisms around profitability, Palantir’s financial health does not seem to be damaged. The emphasis on prioritizing revenue and market share growth has not precluded profitability. The shift towards profitability, as evidenced by its first full year of profitable earnings and an improved operating margin from just over 5% at the end of 2023 to 8.79%, indicates Palantir’s ability to grow sustainably. This growth suggests that Palantir is well-positioned for long-term success, despite growing competition from long-established rivals and newer ones.
Actions Speak Louder Than Words
For all the negative sentiment among analysts, institutional investors are still buying PLTR stock. In the last year, institutional investors purchased nearly $7.5 billion of the company’s stock while selling just $613 million worth of shares. While institutional ownership is only around 45%, this pattern of buyers outnumbering sellers has been in place since the stock debuted in 2020.
As an investor, this should make you ask should you be following what investors are saying or what they are doing. In the case of Palantir, the answer seems clear. The “big money” believes Palantir stock is moving higher. That means that when it comes to the company’s valuation, you should pay attention to what the company reports more than what the analysts believe should happen with the stock.