Palantir stock price at risk of a crash as valuation concerns persist

Palantir stock price has dropped into a local bear market after falling by ~20% from its highest point this year. PLTR was trading at $167, down from the year-to-date high of $207. So, will the stock rebound amid heightened valuation concerns?

Palantir growth is continuing

Palantir is a top company offering services to companies and governments. It primarily offers several products like Foundry, Gotham, Apollo, and AIP. 

Foundry provides enterprise data integration and analysis solutions to companies. Gotham is primarily tailored to government agencies, while Apollo is used in software development and management. The company’s AIP solution helps companies to integrate large language models in their workflows.

Palantir’s business is doing well, with its revenue and profits continuing their upward trajectory. Most notably, its revenue from companies has accelerated, a move that transforms it from being a mere defense contractor. 

The most recent results show that the company’s revenue rose by 63% in the third quarter to $1.18 billion. This growth was driven by the US commercial revenue, which grew by 121%. The US governmen revenue rose by 52%.

Palantir is attracting more companies to its ecosystem. It closed 204 deals worth about $1 million and 91 deals worth about $5 million a year. 

This growth will likely continue as companies continue to embrace its technology. Some of the top customers are companies like American Airlines, BP, HSS, Titan, and Nvidia. 

Most importantly, the company’s business is becoming highly profitable, with its net income rising to over $475 million in the last quarter. 

Valuation concerns remain

Wall Street analysts believe that Palantir’s growth will accelerate in the coming years. The average estimate is that the fourth quarter revenue will be $1.34 billion, up by 62% from the same period last year. 

If the estimate is correct, it means that the company’s annual revenue will hit $4.41 billion, a 53% increase from last year. Chances are that the company’s business will report stronger-than-expected results as it has always done. Its annual revenue is expected to hit $6.19 billion, up by 40% YoY. 

The challenge, however, is that the company’s valuation has become stretched as its market cap has soared to $400 billion. Data compiled by Seeking Alpha shows that the forward price-to-earnings ratio has soared to 290, much higher than other companies.

Similarly, the forward PEG ratio has soared to 4.73, also much higher than the sector median of 1.69. These are huge numbers, considering that a company like Nvidia has a forward PE ratio of 38. It also has a forward PEG ratio of 1.01, higher than the median estimate of 1.69. 

Palantir justifies its valuation by using the rule-of-40 multiple, which looks at a company’s revenue growth and margins. In its recent report, it noted that its rule-of-40 metric stands at 114%, which would make it a bargain. 

However, the limitation is that this multiple has its challenges, including ignoring capital efficiency and oversimplifying its performance. Still, it is hard to justify how a company making less than $10 billion in revenue is valued at over $400 billion.

Palantir stock price technical analysis

The daily timeframe chart shows that the PLTR stock price peaked at $207 in November and then pulled back to the current $167. It has now moved below the ascending trendline, which tests the lowest swings since July 2nd. 

The stock has formed a bearish divergence pattern, pointing to more downside, potentially to the support at $130, its lowest point last year. This price target is about 23% below the current level. A move above the year-to-date high of $207 will invalidate the bearish outlook.

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