Is Palantir Technologies Stock Overvalued?

Palantir Technologies' (PLTR -0.42%) shares have performed remarkably well during its short time as a public company. The stock is up 176% since its late-September market debut.

Palantir came to market with a reputation for technological prowess and some well-regarded backers, and investors are understandably excited about the company's prospects. But at this point, it would be natural to question whether the share price has gotten ahead of the business projections.

What's an investor to think about Palantir shares today? Here's a look at the company and whether the stock is overvalued right now.

PLTR data by YCharts

A history of success

Palantir is a data analytics company that has served U.S. government customers -- and, in particular, its clandestine spy agencies -- for nearly two decades. The company was co-founded by Peter Thiel, the sometimes controversial venture capitalist best known as a co-founder of PayPal and an early investor in both Facebook and LinkedIn. Thiel is now chairman of Palantir's board, but has no day-to-day role at the company.

Until it prepared to go public last year, Palantir was mostly shrouded in secrecy. But its exploits are the stuff of Silicon Valley legend, including its well-reported (but never officially confirmed) role in finding Osama bin Laden.

Today it works with a large number of military and civilian federal agencies, as well as a growing roster of commercial customers. In 2020, an unnamed aerospace customer signed the largest commercial deal in Palantir's history -- a five-year, $300 million contract. It also has made inroads into the pharmaceutical and logistics industries, among others.

Image source: Getty Images.

A tale of two valuations

Palantir has not yet released full-year results, but the company said in November that it expects to generate $1.07 billion to $1.072 billion in revenue in 2020. Assuming that forecast bears out, the market is currently valuing the company at about 45 times sales.

Is that too high? It depends on what measuring stick you use. If you compare its valuation to other IT-focused government contractors such as Booz Allen Hamilton, ManTech International, and Leidos Holdings, Palantir looks way overvalued.

None of those companies have exactly comparable tech to Palantir, but arguably, Palantir doesn't have anything near their breadth of technology or diversity of revenue sources.

Data source: YCharts, as of Jan. 20, 2020. * author's estimate

Palantir bulls would argue that the company's growing commercial business justifies a higher multiple. Indeed, software companies that sell to the commercial sector rather than to governments tend to attract higher valuations because they can attract a wider range of customers and don't face the same budget scrutiny.

Palantir's valuation looks more reasonable when compared to two commercial database specialists, MongoDB and Datadog. But it is worth noting that for much of Palantir's history, it has relied heavily on government sales, and in its third-quarter release said that the U.S. government sector "remains a primary area of focus for our business."

Indeed, prior to going public, Palantir was perhaps best known for its controversial contracts with various intelligence agencies and Immigration and Customs Enforcement, work that it has defended despite a great deal of scrutiny.

So is Palantir overvalued?

It may be too simplistic to categorize Palantir as just a defense contractor, but it would also be wrong to dismiss the connection. Government customers provided 56% of its total revenue in the third quarter, and the government business grew nearly twice as much in the quarter on a year-over-year basis as its commercial business.

Among defense IT companies, Palantir has technology and expertise that few can match, but its tech is arguably more specialized and tougher to sell to a broader set of customers. The company has been around since 2003, and although its growth has accelerated in recent years, it took it until 2020 to hit $1 billion in annual sales.

Palantir has amazing and unique tech, and has the potential to grow into a much larger business. But given the pace of government contracting and the slow rollout of its commercial offerings, it will take years for Palantir's business to justify its current lofty multiple. 

The stock is overvalued right now. For those interested in Palantir, best to leave it on your watch list in anticipation of better opportunities to buy in over the months to come.