Palantir Technologies (NYSE:PLTR) rose about 26% in one day last week, in anticipation of its upcoming Demo Day scheduled for Jan. 26 after the market close. But even if PLTR stock moves up as a result of management’s presentation, it seems clear that it is at a peak valuation.
Why am I not as optimistic on this stock?
Well, because right now, PLTR may have already moved up too far too fast. For example, based on estimates from Seeking Alpha, the stock is trading at about 53 times sales forecast for 2020 and 40 times for 2021. This is based on estimates of $1.07 billion in sales for 2020 and $1.41 billion in 2021.
What Demo Day Could Do
At $32.58 on Jan. 22 — the day PLTR stock rose 26% in one session — the company had a market capitalization of over $56.76 billion. This means that the stock has risen well over 200% since Sept. 30, when it went public at $10.
That makes me think that either the underwriters or management made a big mistake. Either they were really off when they priced the initial public offering (IPO), or business has really picked up since then. Odds are that the latter is the case.
At least, that is my working theory on why the stock has been moving up so dramatically. The market seems to think that analysts are not pricing PLTR properly since its business is much stronger than it appears.
Hence the rise for Palantir’s Demo Day presentations. People think there will be reason to reevaluate the earnings prospects for the company.
But let’s get serious about the valuation. According to Seeking Alpha, the price-to-earnings ratio for 2021 is 281 times analysts’ average earnings estimates. That is based on earnings per share (EPS) estimates of just 12 cents for 2021.
As a result of Demo Day, maybe analysts will be able to raise their earnings estimates, at least for the out years. For example, the valuation does not even fall to a reasonable number until EPS estimates for the year ending 2026.
That is when 2026 EPS is forecast to hit 56 cents per share. This puts the stock on a forward price-earnings multiple of roughly 58 times, albeit six years in the future.
However, if we discount this back to present value using a 15% discount rate, earnings fall to 24.2 cents per share. This puts the 2026 present value P/E to 134 times — still astronomically high.
What To Do With PLTR Stock
At least one major Wall Street analyst is still unconvinced about the recent spike in PLTR stock. The analyst, from Citibank, wrote on Jan. 13 that he believes growth will decelerate in 2021, especially because Covid-19 related contracts will lapse.
Moreover, the analyst believes that there will be headwinds in the second half of 2021, going into 2022. This is especially the case if Palantir’s pandemic contracts aren’t renewed. Finally, the company’s competition — especially when it comes to government contracts — will increase. For these reasons, the Citi Bank analyst’s overall price target is just $15, over 50% below its price today.
And he is not the only one on Wall Street that is skeptical. According to Marketbeat.com, the average price target of eight analysts is $16.29, also more than half of PLTR’s current price of about $35.
The same holds true for Yahoo! Finance, which reports that six analysts have an average target of just $17.83. TipRanks.com reports a similar consensus price of 7 analysts at $17.33 per share.
In other words, Wall Street is highly skeptical. Don’t forget that with prices 50% below the present price, analysts will have to double their target prices. That is the only way their targets will be close to today’s price.
Of course, maybe their minds will be changed by Demo Day. Maybe they will raise their price targets a bit, based on higher earnings estimates. However, I highly doubt that analysts will change their minds and double their targets on PLTR stock just because of one presentation by the company.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
