As famed economist John Maynard Keynes once said, "Markets can remain irrational longer than you can remain solvent." And few stocks exemplify this axiom better than Palantir Technologies (PLTR 4.70%). Shares of this AI-associated data analytics company have skyrocketed by more than 1,250% over the last five years, outpacing the Nasdaq Composite's comparatively measly return of about 110% over the same time frame.
NASDAQ: PLTR
Key Data Points
But don't get it twisted: Palantir is no meme stock. Its business is booming across both the public and private sectors. That said, even a great company can be a poor investment if its valuation is out of step with reality. Let's explore two reasons why investors who hold Palantir stock should consider selling now and taking profits.
Political hype may have influenced the rally
For a non-consumer-facing business, Palantir has long had an unusually enthusiastic set of fans. It boasts 328,000 followers on X today, among them, Elon Musk. But hype about it went into hyperdrive in connection with President Donald Trump's election victory in 2024. Palantir co-founder Peter Thiel was an early backer of Trump and is a close associate of Vice President JD Vance, who previously worked for him at venture capital firm Mithril Capital. Investors may be calculating that Thiel's proximity to political power could benefit the business.
To be fair, a majority of Palantir's revenues come from government contracts, and it boldly inserted itself into controversial partisan issues in a way that aligns with Trump's priorities. The company worked with Immigration and Customs Enforcement (ICE) to help with deportations during the first Trump presidency. And during its most recent earnings call, CEO Alex Karp claimed Palantir is the first company to be, quote, "completely anti-woke."
That said, politics are fickle. What could seem like a winning strategy today could quickly backfire if the wind changes direction. Companies like Anheuser-Busch Inbev, Target, and Tesla have all experienced substantial operational challenges because their politics alienated a portion of their core consumer bases. Investors should consider that Palantir's political exposure may be a long-term risk rather than an opportunity.
Even growth this rapid can't justify such a lofty valuation
Palantir bulls will point to the company's explosive operational performance, and they have a strong point. Third-quarter revenue jumped 63% year over year to $1.18 billion, driven by soaring demand in the U.S. commercial segment, where sales jumped by 121% to $397 million. Palantir's clients are flocking to its Artificial Intelligence Platform (AIP), which helps them better analyze and leverage their internal data.
Palantir's bottom-line performance was also impressive, with operating income jumping by 247% to $393.3 million. And the fact that its growth is coming from the private sector instead of the public sector suggests that Palantir's AI and data analytics tools have managed to establish an economic moat. That said, its valuation remains concerning.
Image source: Getty Images.
With a price-to-sales (P/S) multiple of 126, Palantir trades at a massive premium to the S&P 500's average of just 3.4. It's also significantly more expensive than AI industry leader Nvidia, which has a P/S of 29.7. And despite the fact that it designs and sells physical products, Nvidia has achieved an operating margin of 61% compared to Palantir's margin of 33%. The gap is in part due to Palantir's substantial overhead expenses, which include high levels of stock-based compensation.
In the third quarter, Palantir spent a whopping $172.3 million on stock-based compensation. And while such outlays help motivate employees and managers by giving them ownership in the business, they could also encourage management to overly fixate on stock performance over long-term value. Karp has frequently lashed out at short-sellers, accusing them of market manipulation. This is a worrying sign because it suggests misplaced priorities and a lack of confidence in the company's fundamentals.
What should investors do?
With a market cap of around $455 billion, Palantir's current valuation already prices in many years' worth of hoped-for rapid growth. That makes it hard to get excited about the stock, despite the company's stellar third-quarter performance. Investors who already own Palantir stock should consider taking some profits off the table. That said, shorting the stock would probably be a bad idea because, to bring it back around to Keynes, the market can stay irrational for longer than you can stay solvent.
