Stocks To Sell

Why Palantir Stock Is Overvalued at This Point

Palantir’s (PLTR) business, propelled by the AI boom, has greatly improved. But the longer term PLTR stock outlook is not that favorable. 

Palantir (NYSE:PLTR) and Palantir stock certainly have benefited much more from the artificial intelligence (AI) boom than I thought that they would, as PLTR is now growing rapidly and has finally started generating significant profits. Further, many of the firm’s other metrics have become rather impressive.

However, the company’s net income and profit margins are still not very elevated, while the valuation of its stock, by any measure, is through the roof. Therefore, although I believe that the shares can climb significantly, I think that the PLTR stock outlook is not nearly as strong as that of other AI names.

Consequently, I recommend that investors sell Palantir’s shares at this point.

The AI Wave Has Greatly Boosted Palantir’s Business

Without a doubt, the firm’s fourth-quarter results, reported on Feb. 5, show that its strategy of offering AI-powered products is paying off tremendously.

Indeed, PLTR’s overall top line climbed 20% versus the same period a year earlier, while its “U..S commercial revenue grew 70% year-over-year….to $131 million.”

Also importantly, it generated net income of $93.4 million, more than triple the $30.9 million that it reported for Q4 of 2022. Meanwhile, its user base jumped 35% YoY.

PLTR’s Numbers Don’t Justify the Valuation of PLTR Stock

Palantir’s bottom line came in at $93 million last quarter. While that’s a vast improvement over the losses that it printed not long ago (in 2022 it generated an operating loss of $161 million), $93 million of quarterly profits is still rather anemic for a firm that was founded in 2003 and is considered by many as an elite name in tech.

Consider, for example, that Meta (NASDAQ:META), founded after PLTR, generated $14 billion of profits in Q4. Moreover, Palantir’s operating margin is a rather small 11%. Meta’s operating margin is 41%.

Meanwhile, as I mentioned earlier, the valuation of PLTR is quite stratospheric. Specifically, its forward price-to-earnings ratio is 85, while its trailing price-to-sales ratio is 26 and its Enterprise Value/EBITDA ratio is a truly staggering 186.

Those numbers, in my view, are bubble-like and reminiscent of the valuations that many tech names had in 1999 before crashing spectacularly in 2000. Indeed, University of Pennsylvania Professor Jeremy Siegel recently noted that tech stocks at that time “were changing hands for 60 to 70 times forward earnings.” So PLTR’s current valuation is certainly reminiscent of those nosebleed levels.

And despite the name’s huge valuation, analysts don’t even expect the firm’s profits to grow that rapidly going forward, as their mean estimate calls for its earnings per share to advance to 32 cents this year from 25 cents in 2023.

Given these points, I think that the longer term PLTR stock outlook is not that favorable.

Other AI Names Are Much More Attractive

As I’ve noted in past columns, SuperMicro (NASDAQ:SMCI) is supplying a great deal of the hardware used to facilitate AI. SMCI stock has rallied tremendously in recent weeks, but the shares still change hands at a forward P/E ratio of 27.6 times, much lower than PLTR’s forward P/E ratio of 85 times.

What’s more, SMCI’s bottom line came in at $296 million, about triple PLTR’s net income.

And those looking for an up-and-coming growth name with tremendous potential in the AI space should consider iCAD (NASDAQ: ICAD). The firm uses AI to detect breast cancer more proficiently than mammographies, and it has formed alliances with GE Healthcare (NASDAQ:GEHC), Alphabet (NASDAQ:GOOG,GOOGL), and two of America’s largest owners of clinics that specialize in mammographies.

In my view, iCAD’s current market capitalization of $38 million far undervalues the firm.

On the date of publication, Larry Ramer held long positions in SMCI and ICAD. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.

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