Palantir Technologies‘ (NASDAQ:PLTR) shares fell 6.93% Tuesday (5 May), despite a strong-looking earnings report. So is this a buying opportunity?
The firm’s revenue and profit numbers were off the charts. But so are a different set of numbers and those present a real challenge for investors.
Results
Overall, Palantir’s revenues grew 85%. But the really exciting number was the growth in the US Commercial division. For a long time, the firm’s main client was the US government. That’s a customer with some of the deepest pockets around but, after all, there’s only one of them.
More recently though, the firm’s made a move into a much bigger market. It’s been targeting US companies and taking them by storm. Palantir’s been operating through a series of bootcamps – essentially trial runs of its product. These have been – and continue to be – hugely effective.
Businesses seem to be falling over themselves to sign up after seeing what the firm’s data organising, Palantir Ontology, can do. That’s why the stock’s been surging. That’s not what the word ‘ontology’ usually means, but who cares? The company isn’t showing any signs of slowing down, but the stock fell after the report.
What’s the problem?
When a company’s share price falls as the underlying business gets better, the stock becomes more attractive. And that’s true of Palantir.
The trouble is, the shares are still trading at incredibly high multiples. Despite the decline, the trailing price-to-earnings (P/E) ratio is around 153. That’s certainly lower than it has been in recent months. But does the sentence “it’s a bargain at a P/E of 153” sound plausible to anyone?
This is the problem for investors. Palantir’s results were outstanding, but it’s still hard to say the share price coming down is unjustified. It’s one thing to think a stock’s likely to fall if things go wrong with the business. But it’s another to think it should dip if they go right.
Challenges
It’s also worth noting that the valuation point is before we even get to factoring in the risks with the business. And there are some. The most obvious is Anthropic’s Claude. This is a threat for Palantir to contend with in two main ways.
One is that Claude’s the AI tool that Palantir uses to help customers act on their data. That creates a point of dependence on Anthropic. Another is that Claude’s releasing plugins that can manage certain tasks. Importantly, they can do this without an expensive Palantir set-up.
Both of these are issues for investors to take seriously. And the high valuation multiples amplify the size of any setbacks or disruption.
Risks and rewards
Palantir shares just fell despite the firm reporting some terrific earnings. And I don’t think investors can have too many complaints. The problem is, the stock wasn’t just priced for perfection. It was priced for more than this – even with outstanding results, it still looks expensive.
That makes me wary. I’m ok with a stock falling if things go badly, but the idea that perfect might not be good enough concerns me.
Fortunately, I think there are much more compelling opportunities elsewhere. So I’ll leave Palantir for others and focus on.
