Key Points
Growth isn't everything in stock investing.
Palantir's business growth can't keep up with its valuation.
Palantir (NASDAQ: PLTR) reported very strong earnings once again on Nov. 2. The highlight of the release was its accelerating 96% revenue growth. However, the market didn't love the results, and the stock sold off more than 10% in the days following earnings.
The stock has rebounded some, but recently was still down 5% from its price before earnings were released. Overall, Palantir is down around 20% from its all-time high, so some investors may be viewing this as a buying opportunity.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
But what am I doing? I'm still staying patient. Palantir is a great business that's growing remarkably fast, but there's one huge holdup that keeps me from purchasing shares, and it could be some time before I decide to open a position.
Image source: The Motley Fool.
Palantir is pricey for its growth
At face value, Palantir's AI analytics business is doing fantastic. Its revenue is soaring, and it has 49% profit margins. The business is strong, and so is its outlook, so what's not to love about this stock? It all comes down to the price tag.
The best companies bought at the wrong price can still be bad investments, and that's exactly how I view Palantir's stock. Palantir trades at about 100 times this year's earnings and 67 times next year's earnings.
PLTR PE Ratio (Forward) data by YCharts
For reference, I can buy other AI stocks, like Nvidia or Alphabet, which trade at 11 and 19 times next year's earnings, respectively. These two are stalwarts in the industry, yet trade at huge discounts. Palantir's growth will be dedicated to reducing its valuation over the next few years, while Nvidia and Alphabet are cheap enough that every bit of growth they deliver should result in a corresponding rise in their stock.
That makes the long-term prospects for these two (and countless other AI investments) far stronger. As a result, I'm OK passing on Palantir. There are many great AI investments, and you don't have to invest in them all. The day of reckoning for Palantir's stock valuation could be coming soon, as it has maintained its high valuation even while many other AI stocks have seen their valuation premiums erased. Time will tell, but right now it seems like a precarious time to be a Palantir investor, with so many other great deals available in AI stocks.
I'd consider buying Palantir stock at around 30 to 40 times forward earnings, but we're a huge sell-off away from seeing those levels.
Keithen Drury has positions in Alphabet and Nvidia. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.