PLTR Outperforms Yesterday, But Is Still Off 52 Week High.

One of today's standouts was Palantir Technologies, a software company whose shares are up 4.1%, outperforming the Nasdaq by 2.1%. At $7.94, shares are -22.76% below their average analyst target price of $10.28. The average analyst rating for the stock is hold. PLTR may have outstripped the S&P 500 index by 2.1% today, but it has lagged behind the index by -53.3% over the last year, returning -67.0%.

Palantir Technologies Inc. builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. The company belongs to the technology sector. The tech sector encompasses a wide range of industries such as computer software, computer hardware, semiconductors, scientific instruments, communications equipment, and consumer electronics. Despite the sector’s spectacular boom and bust at the turn of the century, investors still flock to tech companies in the hopes of capturing gains.

Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets. Despite the significant risks involved, just about everyone from professional portfolio managers to amateur investors consider technology companies such as Facebook, Apple, Google, and Microsoft as “safe” bets.

Palantir Technologies does not release its trailing 12 month P/E ratio since its earnings per share of $-0.25 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for PLTR of -31.5. Based on the company's positive earnings guidance of $0.19, the stock has a forward P/E ratio of 41.8.

The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

Palantir Technologies's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 5.94 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Palantir's gross profit margin trends:

  • 2021 gross margins: 78.0 %
  • 2020 gross margins: 67.7 %
  • 2019 gross margins: 67.4 %
  • 2018 gross margins: 72.2 %
  • Average gross margin: 71.3 %
  • Average gross margin growth rate: 3.0 %
  • Coefficient of variability (lower numbers indicating more stability): 7.0 %

We can see from the above that Palantir's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.

Palantir's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

  • 2021 free cash flow: 321,224,000.00 %
  • 2020 free cash flow: -308,844,000.00 %
  • 2019 free cash flow: -178,311,000.00 %
  • 2018 free cash flow: -54,416,000.00 %
  • Average free cash flow: 321,224,000.00 %
  • Average free cash flown growth rate: -32.3 %
  • Coefficient of variability (lower numbers indicating more stability): 492.9 %

Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, PLTR is in a position to do either -- which can encourage more investors to place their capital in the company. We are nonetheless concerned by the historical inconsistency in the cash flow trends.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. Palantir Technologies's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 7.0, so it's likely that equity investors are over-valuing the company's assets.

As of third quarter of 2022, Palantir is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and an unconvincing cash flow history. The stock has mixed growth indicators because of its strong gross margins, that display an upwards trend, an inflated PEG ratio. We hope this analysis will inspire you to do your own research into PLTR's fundamental values -- especially their trends over time.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.