At one point, it seemed like the software giant Palantir Technologies Inc. (NASDAQ:PLTR) could do no wrong. The company has had an amazing run on Wall Street under its belt since it started trading, the magnitude of which can be gauged from the fact that the company first traded in 2020 at $10 per share and subsequently rose to $125 per share earlier this year.
Safe to say, the company is doing better than a lot of other software names at the moment. Over the past three years, Palantir’s stock has gained close to a whopping 700%. What’s more noticeable is the fact that the company posted this gain while the overall market was sledding uphill thanks to inflation and subsequent interest rate hikes. For instance, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) gained about 35% during the same period.
The company’s software solutions and commercial push have impressed investors, who have readily invested in the company’s momentum. More recently, some weakness has hit Palantir’s stock when it fell 30% from 52-week highs. Even after the dip, the company’s valuation is stretched as evidenced by the price sitting at a whopping 157.71x forward non-GAAP earnings.
This valuation also opens up the possibility that the share price can experience a significant decline if market forces go against it. So, we look into Palantir a bit more closely to see whether the stock could sustain its momentum or if the prior rally was based on illusory hope.
What Is Happening with Palantir Technologies?
The software landscape is changing with new technologies enhancing their usage and reach. Digitization of institutions also plays a huge part in this. Moreover, the whole landscape is buzzing with the prospects artificial intelligence is showing right now, although disagreement exists about quite how transformational it will be.
Gartner forecasts overall IT spending to grow by 9.8% year-over-year in 2025, with software spending expected to notch a double-digit growth rate at 14.2%, which is a bit better than the growth rate recorded last year. While software spending continues to grow, there are some other mechanisms at play as well.
Palantir operates in four distinct categories: Gotham, Foundry, Apollo, and its Artificial Intelligence Platform (AIP). The company’s Gotham offering has long been a trusted offering for global defense agencies and helps them in counterterrorism measures.
So, it was not actually a surprise when news from the Pentagon affected the stock deeply as the company somewhat relies on government contracts. The Pentagon announced that it is reviewing its military spending, which could move tens of billions of dollars from some programs to higher-priority ones. Defense Secretary Peter Hegseth has expressed a goal to reduce the Pentagon’s budget by approximately 8% annually over the next five years.
This was also coupled with the news that Palantir’s CEO, Alex Karp, was planning a massive stock sale. Karp adopted a rule 10b5-1 trading arrangement to potentially sell shares through various transactions under certain conditions. PLTR lodged its worst trading day in a long time after this news weighed on the stock.
With all that said, the AIP platform, launched in 2023 to support the commercial sector, is gaining a lot of traction. Real-time AI-driven decision-making processes are made possible through the AIP platform and its other offerings are still in demand despite all the noise surrounding the company.
Is Palantir Stock Overhyped?
Trading at 430x earnings and 69x sales, Palantir has all the hallmarks of an overhyped stock. If you were to put the ingredients into the mix, Palantir is trading at high revenues and earnings multiples, and is highly volatile, plus it lacks sufficiently fast growth needed to justify the earnings figures on display.
Palantir has last reported itsfourth quarterly and full-year results for fiscal 2024 with quarterly revenue up by 36% from the prior year’s period to $828 million, eclipsing analysts estimates.
The commercial segment has become Palantir’s moneymaker and is growing faster than all the other divisions. In Q4, 188 commercial deals closed in the U.S. during the quarter, which collectively contributed to U.S. commercial revenues soaring by 64% on a year-over-year basis.
The same couldn’t be said for the bottom line, which took a hit due hefty one-time expense related to its market-vesting stock appreciation rights.
Earnings per share came in at $0.03, or $0.07 if we exclude the SAR-related expenses. On an adjusted basis, the $0.14 EPS was considerably better than what analysts were expecting.
Palantir’s path remains clear. It continues to invest heavily in AIP and is predominantly looking inward toward the U.S. for better opportunities. As the financials grow like a mushroom, it has a chance of gaining back some of its lost momentum. But for now the technical damage is firm, and not to be trifled with. In other words, expect volatility but not a return to former highs near term.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
