When it comes to scorching hot artificial intelligence (AI) stocks, investors need not look much further than the "Magnificent Seven" -- Nvidia, Microsoft, Alphabet, Amazon, Tesla, Meta Platforms, and Apple.
Beyond the megacap tech giants, however, a select few other companies are holding their own in the AI realm. In particular, the performance of data analytics software specialist Palantir Technologies (PLTR 3.05%) has been nothing short of remarkable since AI emerged as the market's current transformational megatrend.
Last year, Palantir was the top-performing stock in the S&P 500 (^GSPC 1.67%), gaining nearly 340%. Since it went public in late 2020, its shares are up by more than 1,000%.
Given that meteoric rise, however, Palantir stock has gotten pretty pricey -- limiting the ability of some smaller investors to buy it. For this reason, you might suspect that a stock split could be on management's agenda.
While the logic behind that conclusion is reasonable, I see two reasons why Palantir won't split its stock in 2025.
NASDAQ: PLTR
Key Data Points
Reason 1: Palantir has finally earned the respect of Wall Street
Palantir is a bit of an enigma. The company stayed private for almost 20 years, essentially bankrolled by venture capital funds and high-profile (but sometimes tight-lipped) finance personalities such as Peter Thiel.
On top of that, the company primarily worked with the U.S. military, intelligence agencies, and defense agencies on classified projects. For these reasons, most analysts on Wall Street really didn't know much about Palantir's inner workings, and viewed it more as a government contractor than a software company. Wall Street doesn't like unpredictability, and given the lumpy nature of the revenues from Palantir's public sector business, it wasn't exactly welcomed to the public markets with enthusiasm.
In the last couple of years, however, the narrative has shifted. Since the start of the AI revolution, Palantir has made a splash in the private sector and forged lucrative partnerships with some of tech's biggest players, including Microsoft, Amazon, Meta Platforms, and Oracle. In just two short years, Palantir has nearly doubled its revenue growth rate -- leading to widening margins, consistent free cash flow, and a transition to profitability under generally accepted accounting principles (GAAP).
All of this undoubtedly improved the company's reputation across Wall Street. According to data compiled by Bloomberg, institutional investors now own roughly 54% of Palantir. Some of the largest money managers with positions in it include Vanguard, BlackRock, and State Street. I think rising institutional ownership is a subtle benefit in the sense that more fund managers are now talking about Palantir during public interviews -- thereby putting the company on more investors' radars.
Last year, Palantir grew large enough to warrant inclusion in the S&P 500 and Nasdaq-100, two indexes that fund managers closely analyze.
Image Source: Getty Images.
Reason 2: A stock split could be counterproductive
Companies tend to engage in stock splits after their shares have experienced outsized price increases. Smaller retail investors may view a stock with a particularly high per-share price as being too expensive to buy, and if their brokerage doesn't offer the option of buying fractional shares, it really may be. In that context, management may opt for a stock split in order to increase the number of potential buyers, and thus improve the stock's liquidity.
Yet stock splits also often come with pronounced volatility. After the event, the newly lower share price is often perceived as cheaper by unsophisticated investors. In turn, stock-split stocks tend to experience surges of buying activity, pushing their market capitalization even higher.
While this might make retail investors feel like they are investing in a company at a good price, they are actually buying the stock at a higher valuation than it was trading at prior to the split. In the wake of such pops, it's not uncommon for stock-split stocks to suddenly experience sudden drops as traders cash out on the momentum.
To me, this situation poses a risk for Palantir. If the company were to conduct a stock split, my hunch is that retail investors would begin scooping up shares in droves. That could lead some hedge funds and wealth management firms to trim their positions or cash out entirely as Palantir's valuation becomes overextended. The result might shift the company's reputation, leaving it viewed as more of a "meme stock" rather than a respectable top pick among Wall Street's most influential money managers.
Palantir has spent two decades proving that it can compete with tech's biggest players. Now that the company is finally seen as a legitimate force, I doubt it will do anything that might put its reputation with institutional investors at risk.
