One of today's standouts was Palantir Technologies, a information technology company whose shares are up 4.8%, outperforming the Nasdaq by 4.0%. At $15.86, the stock is 12.37% above its average analyst target price of $14.11.
The average analyst rating for the stock is hold. PLTR outperformed the S&P 500 index by 4.0% so far today, and by 87.0% over the last year with a return of 98.0%.
Palantir Technologies Inc. builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. The companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.
The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.
Palantir Technologies does not release its trailing 12 month P/E ratio since its earnings per share of $-0.02 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for PLTR of -792.8. Based on the company's positive earnings guidance of $0.27, the stock has a forward P/E ratio of 58.7. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Palantir Technologies's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.8 Price to Earnings Growth (PEG) ratio. In PLTR's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.
To better understand the strength of Palantir Technologies's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
|Date Reported||Total Revenue ($ k)||Operating Expenses ($ k)||Operating Margins (%)||YoY Growth (%)|
- Average operating margins: -47.3 %
- Average operating margins growth rate: 57.1 %
- Coefficient of variability (lower numbers indicate less volatility): 111.0 %
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 Cash Flow ($ k)||YoY Growth (%)|
- Average free cash flow: $108.62 Million
- Average free cash flow growth rate: 0.0 %
- Coefficient of variability (lower numbers indicating more stability): 519544610.8 %
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 11.53, 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 a flat course. The stock has mixed growth prospects 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.