Palantir Technologies (NYSE:PLTR) offers data analytics, cybersecurity and artificial intelligence services. AI technology is a hypergrowth market, but caution is advised. Palantir stock has already priced in expected growth, so it’s not a good time to buy.
As the old saying goes, trees don’t grow straight to Heaven. At some point, Palantir Technologies’ valuation is bound to deflate and the share price is due for a pullback.
So, don’t get into the bad habit of chasing expensive stocks. When the time is right and the price is more reasonable, you can confidently pull the trigger on Palantir stock.
Palantir’s Financial Growth Isn’t Mind-Blowing
First of all, Palantir Technologies’ overeager investors should bear in mind that businesses and even governments can’t just spend endless money on Palantir’s products.
In a stark example of this, the United Kingdom government just ended its 27 million euro border-software contract with Palantir Technologies due to “budget pressures.”
Furthermore, it’s a misconception to think that Palantir’s sales and income are expanding at warp speed. Notably, Palantir’s revenue grew 17% year over year in 2023’s third quarter, followed by 20% growth in the fourth quarter and 21% growth in 2024’s first quarter.
In other words, Palantir’s sales growth is accelerating gradually, not by leaps and bounds. Meanwhile, the company posted adjusted EPS of 7 cents in Q3 2023, followed by 8 cents in Q4 2023 and 8 cents in Q1 2024.
I don’t know about you, but I’m not seeing any hypergrowth in those data points. This would all be fine if Palantir stock were reasonably valued, but you may be shocked to discover how overpriced it really is.
Palantir Is the ‘Most Expensive Name’
Jefferies Senior Analyst Brent Thill summed up the problem concisely. He called Palantir Technologies the “single most expensive name in our coverage universe.”
That’s a powerful claim, but it’s not unreasonable at all. Consider that Palantir’s GAAP-measured trailing 12-month price-to-earnings ratio is a jaw-dropping 194.32x.
For reference, the sector median P/E ratio is 30.64x, and market darling Nvidia’s (NASDAQ:NVDA) P/E ratio is 75.7x.
It’s difficult to justify Palantir’s P/E ratio in light of the company’s aforementioned revenue and EPS growth stats. Thus, Thill expects that there will be “better entry points for the stock.”
This isn’t a criticism of Palantir Technologies as a company. Thill praised Palantir’s “great momentum … in their suite and customer adoption,” and I’m fully on board with that assessment.
It’s just a matter of being patient and waiting for the right entry price for Palantir stock.
Buy Palantir Stock at This Price
Palantir Technologies’ P/E ratio will come down if and when the share price declines in 2024’s second half. Waiting can be the hardest part, but it’s a necessary part of the value-investing process.
Palantir stock traded at $16 before it shot up like a rocket earlier this year, but it’s not likely to revisit $16 anytime soon. Hence, $20 is a more realistic buy price.
Then, you can buy more shares if the stock continues falling to $18 and $16. That’s a smart way to invest in Palantir Technologies, and in the growth of the AI technology market, at a more reasonable price.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.