Palantir’s unwavering momentum sends valuation into stratosphere

Beyond Wall Street, Palantir has a controversial reputation, as its involvement with government programs, and its chief executive Alex Karp's outspoken views, have sparked criticism. Photo by Kevin Dietsch/Getty Images/Postmedia files

Article content

Article content

The shares were priced at 85-times sales expected over the next 12 months, as of Friday, making them by far the most expensive in the S&P 500 Index. Based on price-to-earnings, Palantir was the fourth-priciest company in the index after Albermarle Corp., Warner Bros. Discovery Inc. and Boeing Co. The stock was also the fifth-best performer in the S&P 500 this year with a 165 per cent gain through Friday’s close.

Article content

Article content

Article content

The stock jumped as much as 3.5 per cent on Monday ahead of results due after the close of trading, putting it on track to close at an all-time high.

Article content

Article content

Analysts expect Palantir to post a 50 per cent increase in third-quarter revenue, with adjusted earnings per share jumping nearly 70 per cent. Those are impressive numbers. But whether they’re enough to keep the rally going is another issue.

Article content

“Valuation is our big stumbling block,” said Morgan Stanley analyst Sanjit Singh, who has the equivalent of a hold rating on the shares. “The most expensive I’ve seen in my career.”

Article content

Article content

Concerns about the data analysis company’s hefty price tag are nothing new. Most analysts continue to shy away from full-throated recommendations, with twice as many assigning the stock sell or hold ratings than buy.

Article content

Beyond Wall Street, Palantir has a controversial reputation. Its involvement with government programs like immigration control, an AI fraud detection partnership with mortgage finance giant Fannie Mae and relationship with the Israeli government have all sparked criticism. And its chief executive Alex Karp has himself been outspoken on various political topics.

Article content

Article content

A representative for Palantir didn’t immediately respond to a request for comment.

Article content

Article content

Palantir has a “great CEO, a legitimate business, and a great product,” said Vikram Rai, portfolio manager and macro trader at First New York. But its stock price is being fuelled by broader trends lifting momentum plays rather than fundamentals, he said.

Article content

Others agree.

Article content

“When the music stops, this stock is going to get hit harder than others,” said Matt Maley, chief market strategist at Miller Tabak + Co. He applauds Karp and notes that Palantir is one of the few companies out there that’s making money from its AI investments. However, the stock price gives him pause.

Article content

“There are other AI plays which are cheaper, like Nvidia, that will be a little safer right now,” Maley said.

Article content

The most recent leg of Palantir’s rally came late last month, as Nvidia Corp.’s market cap topped US$5 trillion after chief executive Jensen Huang dismissed worry about an AI bubble and announced new partners, including Palantir.

Article content

Meanwhile, new deals with countries ramping up military spending keep coming, like the one Poland signed last week. The company is also bolstering its more overlooked commercial business, for example inking an agreement to provide AI software to telecom company Lumen Technologies Inc. Commercial clients accounted for 45 per cent of Palantir’s revenue last quarter, with the other 55 per cent coming from its government segment, according to data compiled by Bloomberg.