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Palantir (NASDAQ:PLTR) stock’s up 810% over the past five years. Coupled with a modest depreciation of the pound versus the dollar, £10,000 invested in Palantir in late November 2020 is now worth £95,000. To anyone who made that investment, kudos!
So why did that happen and what might happen now?
Dominance in software, data, and AI
Palantir’s surge over the past five years is partially rooted in an operational shift. The company turned what was once a bespoke, services-heavy government contractor into a scalable, high-margin software platform built around its products Gotham, Foundry and Apollo.
That architecture lets it integrate messy data, encode operational workflows and deploy artificial intelligence (AI) applications across cloud — that means on-premise and edge environments.
Government contracts gave Palantir stable, high-profile reference wins, but the stock really started to re-rate when US commercial revenue began growing quickly. Palantir’s approach is to start with a small, focused workflow for a client, then gradually add extra modules and AI tools at a very low additional cost.
This shift expanded recurring revenue, boosted free cash flow and demonstrated operating leverage. Perception changed too. It’s now seen as the product-leading company in the sector, with the potential to take an outsized share of the market.
Financially, the results have been incredibly impressive — it registered 63% revenue growth in the last quarter. And this perception of the business’s operational superiority has contributed to an extraordinary valuation — it trades around 240 times forward earnings.
Can the share price surge again?
The answer to the ‘where next?’ question is inevitably challenging, but it revolves around the company’s ability to justify the valuation. At 240 times forward earnings, it’s trading at a 925% premium to the information technology sector average.
And even adjusting for the earnings growth expected by analysts in the medium term, it looks expensive. The price-to-earnings-to-growth (PEG) ratio of 5.5 is a clear sign of overvaluation. Most investors would be mad to buy a stock at these levels.
However, Palantir is clearly a special case. Those who believe in the company think its operational superiority will deliver massive annual increases in earnings for years to come. This would make it incredibly appealing.
The concern, and this is something I share, is that it will struggle to justify these valuation numbers. Simply, the earnings growth it needs to deliver is almost unheard of. And if it slips, the market will punish the stock.
It’s also worthwhile noting that the ‘long term’ is a long time to maintain operational superiority. Admittedly I don’t use Palantir products in my day-to-day, but it’s not unimaginable to think that another company, perhaps even a bigger tech player, could tap into this moat.
With that in mind, Palantir may look quite a risky investment. But it’s also become a FOMO (fear of missing out) stock. Some investors see this type of exposure as being integral to their portfolios.
Personally, I don’t believe Palantir’s worth considering right now. Instead, investors should consider stocks where the valuation is easier to justify.
