Palantir Technologies (PLTR +0.52%) stock may be considered a bit risky by some -- not because of any underperformance by the company from an earnings perspective, but rather the idea that the stock has soared a mind-boggling 1,900% over three years. And that's left it trading at a hefty valuation, a point that could weigh on its potential for gains and even drive the stock lower.
So you may hesitate to get in on Palantir right now, but at the same time, you might easily drive to your local grocery store and do something much riskier: pick up a Powerball ticket. Spending only a few dollars may not seem like a big deal to you, but if you do this even a couple of times a month, it could add up. And the result generally will be money lost. About half of Americans buy lottery tickets, but on most occasions, they win nothing, a Motley Fool Money report shows. As for investing, only 21% of U.S. families directly own stock even though the stock market has delivered much better results than the lottery -- the S&P 500 has recorded an average annual gain of 10% over time.
Considering these lottery statistics and the stock market track record, my prediction is Palantir is a safer bet than Powerball. Let's take a closer look at how this tech stock might offer you a better return.
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You don't have to invest thousands
First, it's important to note that you don't have to invest hundreds or thousands of dollars to get in on a stock -- instead, you can opt for fractional shares, offering you the opportunity to invest the amount you want and/or the amount you can afford. Or, in the case of Palantir, which trades for just under $160 today, you might choose to buy one or two shares. You don't have to go all in and purchase hundreds of shares of a company in order to benefit from that stock's progress over time. So, you truly can allocate the few dollars you might spend on the lottery to a stock investment instead.
Now, let's talk about Palantir specifically. It's true that this software company, trading for more than 200 times forward earnings estimates, looks expensive according to this metric. But it's important to remember that this valuation measure considers next year's potential earnings -- not earnings a few years down the road. That's why it's difficult to completely rely on valuation when looking at a high growth tech player like Palantir.
Of course, this valuation situation may stop some investors from buying the shares, and this could lead to sluggishness in stock performance or even declines in the near term. But earnings performance is what generally drives long-term stock performance, and here, things look bright.
NASDAQ: PLTR
Key Data Points
Palantir's record revenue
Palantir has been reporting record revenue quarter after quarter as both the U.S. government and commercial customers pile into its artificial intelligence (AI) powered software. The software helps these customers aggregate data and make the best possible use of it. While this might sound boring, it actually is delivering pretty compelling results -- Palantir's customers are gaining in efficiency, conquering challenges, and making game-changing discoveries thanks to the company's platforms.
And this has been reflected in recent earnings reports. In the latest quarter, Palantir reported double-digit growth in its U.S. government and U.S. commercial businesses -- as it has in past quarters too -- and lifted full-year guidance nearly across the board, from revenue to adjusted operating income. Importantly, the company is expertly balancing revenue growth with profitability as we can see in its Rule of 40 score of 94%. Generally 40% or better is seen as excellent, so here, Palantir clearly is excelling.
Should you wait to buy Palantir?
It's possible that Palantir shares will pull back at some point amid valuation concerns, but I wouldn't expect this to become a long-term movement as long as Palantir keeps delivering earnings growth. Now you might ask: Why shouldn't I just wait and buy Palantir when it falls? The answer here is we don't know for sure whether the shares actually will decline. They might remain at the current level or even head higher in spite of the valuation situation.
But, the good news is, if you aim to invest for the long term -- at least five years -- near-term fluctuations aren't likely to impact your overall returns by very much. This means that buying Palantir now, even at today's valuation, still may set you up for a win over time. And my prediction is it's a lot safer than playing Powerball.
