One of the biggest losers as of today's afternoon session is information technology company Palantir Technologies, whose shares are down -5.2%, underperforming the Nasdaq by -4.0%.
At $14.88, PLTR is 47.08% above its average analyst target price of $10.12.
The average analyst rating for the stock is hold. PLTR underperformed the S&P 500 by -4.0% so far today, but outpaced the index by 4028.0% over the last year with a return of 5422.4%.
Palantir Technologies does not release its trailing 12 month P/E ratio since its earnings per share of $-0.12 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for PLTR of -124.0. Based on the company's positive earnings guidance of $0.25, the stock has a forward P/E ratio of 59.5. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Palantir Technologies's PEG ratio of 1.02 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To better understand the strength of Palantir Technologies's business, we can analyse its operating margins, which are its revenues minues its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ 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%
Palantir Technologies'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:
| 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 (lower numbers indicating more stability): 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, 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 with an upwards trend. 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.
