Palantir’s ultra-expensive valuation sparks worry into results

(Bloomberg/Felice Maranz) — The setup ahead of Palantir Technologies Inc. earnings is a familiar one: The stock hovers around a record and boasts the highest price-to-earnings ratio on the S&P 500 Index.

Wall Street has long been leery of Palantir’s runaway valuation. More than twice as many analysts assign the stock sell or hold ratings than buy. Its forward price-to-earnings ratio is 229, more than double the second-priciest tech company — Crowdstrike Holdings Inc. — and eight times as expensive as tech peers. Shares advanced as much as 4.3% in early Monday trading, touching an intraday record.

Even so, investors have kept plowing money into the stock, which also boasts a large retail following. Bulls have looked past the eye-watering P/E ratio to home in on Palantir’s growth potential given its ties to the US government, its growing commercial offerings and use of artificial intelligence.

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That exuberance is spurring some unease. If Palantir wants to satisfy investors, it has a high bar to clear when it reports after the close on Monday.

“The company is now in a position where they have to blow out numbers,” Ted Mortonson, managing director at Robert W Baird & Co Inc., said. “They just have to absolutely annihilate the Street.”

Gil Luria, DA Davidson’s head of technology research, pointed to Palantir’s last several quarters, where it “easily” beat earnings estimates. The company seems to have “more momentum than any other publicly traded software company,” with expectations “as high as ever,” he said.

He cites the company’s estimated organic revenue growth rate of 35% this year, which is the highest among the 100+ software companies he tracks. Palantir also has the highest expected free cash flow, at a 42% margin.

Still, Luria says he’s “very aware of the sky-high valuation,” which is why his firm rates Palantir stock neutral.

Analysts will be assessing Palantir’s efforts to grow its government businesses, both with the US and other countries. That includes Palantir bull Daniel Ives, at Wedbush Securities, who highlighted a recent US Army deal worth up to $10 billion as an “additional tailwind.”

On the commercial side, Luria says the company “will need to build on the success they have had with their AI pilot program and convert all those new customers to longer-term relationships.”

Plus, Palantir will also increasingly have to contend with a “rising talent war” for capable AI professionals, Luria warns. In recent weeks, Alphabet Inc.’s Google was said to have struck a deal to pay about $2.4 billion for top employees and licensing rights from AI coding startup Windsurf, while Meta Platforms Inc. made unusually high compensation offers to new members of its “superintelligence” team — including a more than $200 million package for a former Apple Inc. engineer.

There are reasons to hold Palantir stock even though it’s expensive, said Jim Worden, chief investment officer at the Wealth Consulting Group. Palantir could be at an “Apple moment,” like when the iPhone first came out, he added.

“I hear all the people that say it’s super expensive, it’s priced for perfection,” Worden said. “If they’re in this Apple moment, which they very well could be” — with a billion dollars a quarter in revenue rising to $10 billion, then $20 billion — the company could grow into its valuation, he said.

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Earnings Due Monday

Earnings Premarket:

On Semiconductor Corp. (ON US)

Earnings Postmarket:

Palantir Technologies Inc. (PLTR US)
Ichor Holdings Ltd. (ICHR US)
EverQuote Inc. (EVER US)
IAC Inc. (IAC US)
Lattice Semiconductor Corp. (LSCC US)
IAC Inc. (IAC US)
ZoomInfo Technologies Inc. (GTM US)

–With assistance from Carmen Reinicke, Subrat Patnaik and Brandon Harden.

(Updates trading.)

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