Palantir Stock vs NASDAQ

Surveillance and security software company Palantir (NYSE:PLTR) has been a controversial and volatile investment over the last several years.

 

While bullish investors believe the stock could generate enormous returns, bears believe it has been badly overvalued and overbought due to hype and a general investor thirst for high-growth companies.

 

Today, we’ll look at Palantir and compare it to the NASDAQ 100 index to see which is likely the better investment going this year.

 

Due to its heavy tech exposure, the NASDAQ fared significantly worse than other indices in 2022. The NASDAQ lost 32.54 percent of its value last year, compared to 18.11 percent and 6.86 percent for the S&P 500 and Dow Jones Industrial Average, respectively.

 

Over the same period, Palantir lost nearly 65 percent of its total value. Much of this selloff was due to broader bearishness among investors on tech stocks as interest rates rose. Earnings also fell into negative territory in 2022.

While the stock market as a whole suffered in 2022, there is very little comparison between the losses of the NASDAQ and those of Palantir.

 

The individual stock fell far more than the index, leaving investors who bought at previous highs sitting on massive losses.

 

While Palantir would deliver larger returns in the event of a full rebound, 2022 demonstrated the risk of high-growth, highly valued stocks during economically challenging periods.

 

One of the strongest arguments in favor of Palantir is its forecasted growth. Next year, the company is expected to grow by triple digits, then level off to a compounded average of about 25 percent over the next five years. Given these high projected rates, the stock could be an attractive option for investors seeking rapid growth.

 

This potential for growth is reflected in analyst price targets for the coming year. Analysts views for Palantir over the next year projects an $8 share price, a gain of 25 percent from current levels. The consensus rating for Palantir, however, is currently a hold.

 

Palantir has successfully boosted its revenues over the past year, demonstrating its ability to drive double-digit growth. In Q3, the company reported a 22 percent increase in overall revenue and a 31 percent increase in US revenue. Customer count was also up dramatically, having risen 66 percent over the previous year.

 

A final positive for Palantir is its balance sheet.

 

At the end of Q3, the company held $932 million in total liabilities. Palantir’s reserve of cash and cash equivalents, meanwhile, stood at $2.41 billion. This gives Palantir not only ample cash to cover all of its obligations but also enough capital to continue funding research, development and marketing.

 

Despite the prospect of growing sales and improving earnings, Palantir is not expected to achieve full-year profitability in 2023. The consensus earnings estimate for the coming 12 months is a loss of $0.05 per share. If earnings continue to improve, however, Palantir could reach stable profitability sometime in the next three years.

 

Palantir also faces political risks due to the nature of its business. The company has been widely criticized for intruding on privacy and failing to adequately mitigate its software’s potential for misuse.

 

While Palantir derives much of its revenue from government contracts, political blowback against the company could eventually reduce its government business.

 

The NASDAQ has a long history of steady growth that makes it a good candidate for long-term investment. Over the past 36 years, the index has produced a compounded return of nearly 15 percent annually. Like other indices, the NASDAQ is inherently linked to the overall performance of the American stock market.

 

Unlike investing in a single stock like Palantir, buying the NASDAQ 100 index offers automatic diversification. Although slightly more than half of the index is made up of tech stocks, the NASDAQ also includes consumer services, telecommunications and healthcare stocks. As such, the NASDAQ can mitigate some of the risks of investing in any single stock.

 

History also suggests that the NASDAQ could produce generous returns this year. Although the high-growth tech stocks that are weighted heavily in the index suffered massive losses in 2022, slowing inflation and a less aggressive interest rate policy from the Federal Reserve could cause a rebound among the FAANG stocks in 2023.

 

The stock market could rise by as much as 20 percent in 2023, and the NASDAQ index is likely in a very good position to see strong gains.

 

The downside of the NASDAQ is that it is unlikely to generate the kind of returns that high-growth individual stocks could during a recovery. The same diversification that prevents it from suffering massive losses during bear markets also keeps it from realizing the largest possible returns during bull markets.

 

This lower volatility is a feature of indices when compared to individual stocks and can be either positive or negative, depending on your personal level of risk tolerance.

 

Both Palantir and the NASDAQ index have their advantages. Palantir is a massively sold-off growth stock that could rise significantly over the next few years, especially if it reaches profitability again.

 

The NASDAQ, by contrast, is a diversified basket of stocks that offers protection from the risks of individual companies and could see strong growth alongside the broader stock market when a new bull market begins.

 

Ultimately, investing in the NASDAQ index is likely the better choice for most investors. Beyond the argument for diversification, the NASDAQ offers broad exposure to a group of high-growth tech stocks that could come roaring back as interest rates stabilize.

 

While Palantir may outperform the NASDAQ in 2023, the difference between their likely returns doesn’t make up for the company’s risk profile. While risk-tolerant investors looking for rapid-growth companies may favor Palantir for its prospects and attractive balance sheet, the majority of investors will likely prefer the NASDAQ as a somewhat safer option to profit from a market recovery.

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