Palantir Stock: Buy, Sell or Hold?

Despite its massive run this year, perhaps no company is as divisive among investors right now as Palantir Technologies (NYSE: PLTR). The share price for this technology stock, which has just been added to S&P 500it more than doubled compared to this year and was among the best performers on the market in the last quarter.

Given this strong performance, it’s no surprise that many investors are wondering whether Palantir stock is a buy, sell or hold. Let’s look at the cases for each.

Purchase case for Palantir

while Nvidia was the biggest beneficiary of artificial intelligence (AI) on the hardware side, Palantir has the opportunity to be among the biggest beneficiaries on the software side. The company has already established itself as one of the world’s leading analytics providers, helping the US government fight terrorism and track the spread of COVID-19 during the pandemic.

Its new Artificial Intelligence Platform (AIP) has expanded the use cases for Palantir’s technologies and is being rapidly adopted by commercial customers. The company earns from clients across various industry verticals, including healthcare, insurance, energy, industrial, restaurants and retail. The breadth of industries Palantir serves is impressive, as AIP helps customers build AI applications, actions, and agents to solve complex problems. AIP also has out-of-the-box AI solutions, as well as starter packs and templates that can be customized if needed.

The company is experiencing impressive growth in its US commercial segment, with revenue up 55% year-over-year as it brings in new customers through its boot camps. These five-day bootcamps help potential customers understand how to apply artificial intelligence to critical operations. The strategy is working, as US commercial customers grew 83% year-over-year in the second quarter.

Moving all these new customers from the prototypes it creates in its boot camps to production is Palantir’s biggest opportunity. The company is already posting solid net dollar retention, up 114% last quarter, but that number doesn’t reflect the new customers it’s added over the past year with its boot camps. Palantir said that this transition has been very difficult for most companies, but that it has been able to do it smoothly, as demonstrated by a recent expansion with Tampa General Hospital.

The “scaling” part of Palantir’s land and scale strategy is about to really take off and help accelerate future growth.

Meanwhile, Palantir continues to win new U.S. government contracts, which should help re-accelerate growth from its biggest customer. These include a $99.8 million deal over the next five years for the Army to use its AI-powered Maven smart system to help improve battlefield awareness.

The story continues

Right now, the company has a lot of opportunity and might just be scratching the surface of its potential.

Case for sale for Palantir

In the case of a sale, investors need look no further than the company’s executives, who are doing just that: selling Palantir stock. Chairman Peter Thiel sold 28.6 million shares between September 24 and October 1. The speed with which Thiel threw out so many actions speaks volumes. It also sold 7 million shares in March and nearly 13 million in May.

CEO Alex Karp has greatly accelerated his share sales. Between September 13 and 17, he exercised and sold 9 million options at an exercise price of $11.38 that were not due to expire until 2032. Karp has sold shares before, but this was his largest sale by the number of shares since he sold at the IPO and a big step up from the 575,000 shares he sold in August and the 729,000 he sold in May.

Other executives and company executives resumed selling, all apparently triggered by the stock price rally. And that leads to the biggest reason to sell Palantir stock: its valuation.

The stock trades at a forward price-to-sales (P/S) multiple of 26, based on analysts’ estimates for next year. Very fast-growing, high-margin software-as-a-service (SaaS) companies can command high multiples, but a forward P/S of 26 for a company that grew revenue 27% last quarter is quite extremely.

For example, CrowdStrike is expected to grow slightly faster than Palantir this year, but its stock trades at a P/S ratio of less than 15.

The hold case for Palantir

The holding case for Palantir simply boils down to believing that the stock can accelerate and grow to a significant multiple over the next few years.

Palantir could generate roughly $6 billion in sales in 2027 if it manages 30% revenue growth in each of the next three years (a higher rate than its current pace). At a P/S of 15, like CrowdStrike, the price would be around $41, close to where it’s trading today.

At 35% sales growth, it would generate 2027 revenue of $6.8 billion, and at a P/S of 15, it would be a $46 stock. At 40% growth, it would generate 2027 revenue of $7.6 billion, and at a P/S of 17, it would be a $59 stock.

If it goes up to 40%, I would expect a higher multiple, which is why I used 17x in this scenario. In the latter scenario, it would certainly be worth holding on to the stock, although this kind of acceleration in growth would be quite extraordinary.

verdict

At this point, I’d follow Palantir’s lead and sell at least some stock if I owned it. Executives seem to believe that selling the stock when it crosses $35 is the right move.

The company’s future is bright, but its valuation is way ahead of it right now. Owning or buying the stock is really betting that the company can accelerate its revenue growth closer to 40% or more and sustain it for the next few years. Although possible, it would not be easy. But if Palantir becomes the dominant winner in AI software, like Nvidia in hardware, the sky’s the limit.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions and recommends CrowdStrike, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

Palantir Stock: Buy, Sell or Hold? was originally published by The Motley Fool