Palantir Could Be the Most Overvalued Company That Ever Existed

• StockStory Top Pick PLTR +1.36%

We're entering a new period in the market. Call it what you want - a paradigm shift or simply shifting investor sentiment - but it's clear that valuations now matter.

Quick Read

• Palantir (PLTR) trades at 360x trailing earnings and 153x forward earnings with a market cap near $370B.

• Palantir’s PEG ratio sits at 4.2x based on 36.8% expected earnings growth.

• Palantir would need to grow revenues 1,500% over 25 years to justify its current valuation.

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Unlike previous periods of time, such as the growth frenzy following the onset of the pandemic in which any unprofitable growth stock with a reasonable story could skyrocket in value overnight on an idea alone, investors are clearly clamoring for returns.

Investors aren't looking for returns a decade or two from now, but today. This immediacy and shift in investor risk-taking preferences is on broad display, with a number of the top AI-related tech names in the Nasdaq seeing their valuations hit hard in recent weeks.

Let's dive into Palantir (NASDAQ:PLTR) and its surge this year to all-time highs, followed by its more recent price action, and try to make heads or tails of what's going on.

Here's why I think this recent dip is just that - a dip on the way to a much longer and protracted selloff for Palantir and other similarly-overpriced mega-cap tech stocks.

Let's Dive Into the Fundamentals

Palantir's share price at around $155 per share at the time of writing implies a market capitalization of nearly $370 billion. That's larger than many of the top blue-chip stocks many investors take for granted, and is a valuation that's bestowed upon a company that became profitable just a few years ago (after decades of being unprofitable).

At this current share price level, PLTR stock is now trading at 360-times trailing earnings and 153-times forward earnings. On a price-sales basis, this company's valuation comes in at an eye-watering valuation of more than 100-times.

I'll harken back to the famous investor Peter Lynch, who outlined a common strategy he pinned on what became called the price earnings to growth (or PEG) ratio. His belief is that companies valued at price/earnings ratios which are lower than their underlying earnings growth rates (a PEG ratio less than one) are investable.

Assuming Palantir will continue to grow its earnings at a 36.8% clip (according to analysts' consensus) in 2026, at a forward price-earnings ratio of 153-times, Palantir stock is trading at a PEG ratio of around 4.2-times.

That's roughly four-times more expensive than any stock Peter Lynch would touch, and is an indication to me this is a stock that has gotten way ahead of its skis.

What It Will Take for Palantir's Valuation to Be Justified

Woman holding a smartphone and thinking

One thought experiment I thought would be interesting to put forward is trying to answer the question: what growth rate would be required in order for Palantir to justify its valuation today roughly 25 years down the line.

The numbers I came up with in my model are astounding. Palantir would need to grow its revenues roughly 15-fold (yes, 1,500%) over the next quarter century, implying sustained annual revenue growth in the 35% range over this time frame.

Now, I'm not going to say that's impossible. Anything's possible. But the larger a company gets, the harder it gets for said company to continue to grow at such a rapid rate. The law of large numbers is one feature of mathematics and one of the underlying laws of finance some companies are trying to break right now. But ultimately, it's my view that financial markets will eventually catch on to Palantir's outlandish valuation and this is a stock that will come back down to earth.

Other market participants such as Michael Burry believe Palantir could be the best short opportunity in the market in decades. I can't disagree with that view right now.

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