As PLTR Surges, the Value Story Persists.

Information Technology company Palantir Technologies stunned Wall Street today as it surged to $14.49, marking a 4.0% change compared to the S&P 500 and the Nasdaq indices, which logged 1.0% and 1.0% respectively. PLTR is 43.21% above its average analyst target price of $10.12, which implies future downside for the stock. Indeed, the average analayst rating for the stock is hold, showing a rather gloomy outlook. Over the last year, Palantir Technologies shares have outperformed the S&P 500 by 36.0%, with a price change of 49.7%.

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 is a technology company. 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.

Palantir Technologies does not release its trailing 12 month P/E ratio since its earnings per share of $-0.12 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for PLTR of -120.8. Based on the company's positive earnings guidance of $0.25, the stock has a forward P/E ratio of 58.0. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. 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 0.92 Price to Earnings Growth (PEG) ratio. In PLTR's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

To better understand the strength of Palantir Technologies's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 1,905,871 1,658,523 -8.46 68.27
2021-12-31 1,541,889 1,613,531 -26.66 75.18
2020-12-31 1,092,673 1,913,805 -107.41 -38.36
2019-12-31 742,555 1,076,626 -77.63 n/a
  • Average operating margins: -55.0 %
  • Average operating margins growth rate: 42.5 %
  • Coefficient of variability (lower numbers indicate less volatility): 82.8 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Palantir Technologies's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 223,737 -40,027 183,710 -42.81
2021-12-31 333,851 -12,627 321,224 204.01
2020-12-31 -296,608 -12,236 -308,844 -73.21
2019-12-31 -165,215 -13,096 -178,311 n/a
  • Average free cash flow: $4.44 Million
  • Average free cash flow growth rate: 19.4 %
  • Coefficient of variability (the lower the better): 6674.6 %

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.

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 first quarter of 2023, the average P/B ratio for technology companies is 6.23. 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 11.27, so it's likely that equity investors are over-valuing the company's assets.

As of first quarter of 2023, Palantir Technologies is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and irregular cash flows that are on an upwards course. The stock has strong growth indicators because of its consistently negative margins with a positive growth rate, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into PLTR's fundamental values -- especially their trends over time.

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.