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There is no doubt that Palantir Technologies (NASDAQ: PLTR) has been a stunning stock market performer. Palantir stock has increased in value by 1,751% over the past five years. Wow!
I have looked at Palantir a few times over the years and weighed up whether buy to the stock for my portfolio.
But each time I have arrived at the same conclusion: no.
Here are three reasons why I am not buying Palantir stock for my ISA at the moment.
Palantir remains a black box for me
Billionaire investor Warren Buffett examines loads of businesses but only ends up investing in a fraction of them.
One reason for that is that he only likes to invest in businesses he feels he can understand. As Buffett puts it, he aims to stay inside his ‘circle of competence’.
I think that is a smart approach for any investor and aim to do the same myself.
The thing is, I am not confident that I really understand and can assess what Palantir is as a business.
Sure, I can look at parts of its client list, pore over its accounts, and get to grips with some of the usage case for its products.
But do I really understand it, even after all that? No.
Palantir’s core technology remains a black box to me, making it difficult for me to assess whether it has a sustainable competitive advantage or could be displaced in years to come by a rival with better technology.
The valuation looks crazy
While, I do not fully understand the business, I do feel I have a handle on the numbers.
The old saying goes that numbers do not lie. Of course a lot of context is often required, but as an investor, even a basic set of numbers can typically tell me a lot.
At the moment, Palantir stock sells for 566 times earnings.
That sort of price-to-earnings ratio strikes me as fantastical. It means that, even if Palantir was to grow its earnings tenfold and not issue a single new share, it would still sell for close to 60 times earnings.
Without fully understanding the business, I cannot take a clear view on what earnings growth is likely to be. But I do know that a P/E ratio well north of 500 is never going to offer me the sort of margin of safety I seek as an investor.
I don’t like the client list
I am happy to invest in tobacco stocks. I am happy to invest in some companies that sell products to people I do not like. Not everyone who uses Lux soap has squeaky clean ethics, but that would not put me off investing in Unilever, for example.
By contrast, Palantir gets to choose its customers much more selectively than a consumer goods firm. Some of them are simply not organisations I find at all appealing.
As an investor, that matters not just in terms of personal ethics, but also potentially in cold hard financial terms. A controversial client list can lead to reputational damage.
For that and other reasons, I continue to avoid Palantir stock.
