With the odds of former President Donald Trump winning November’s election rather high, I’m much more upbeat on the outlook of Palantir Technologies (NASDAQ:PLTR) and Palantir stock than I have been in recent years. However, given the huge valuation of the shares and the Street’s mixed views on the name, I remain cautious nonetheless.
Trump’s Reelection Would Probably Lift Palantir’s Financial Results
Palantir co-founder Peter Thiel looks likely to offer substantial financial support for Trump’s campaign sooner or later. A former supporter, Thiel has seen JD Vance, known as his “protege,” selected as Trump’s running mate. Moreover, Thiel is viewed as friendly with Tesla (NASDAQ:TSLA) CEO Elon Musk, who recently backed Trump and is reportedly donating $45 million per month to his campaign.
Thiel, however, has expressed a great deal of disappointment with Trump’s tenure as President. Still, given Vance’s status as Trump’s running mate and Musk’s huge backing of the Republican, along with the fact that Thiel could greatly improve Palantir’s outlook by donating funds to Trump, I believe the multibillionaire will donate significant funds to Trump sooner or later.
And according to most polls, Trump is running ahead of the likely Democratic presidential nominee, Kamala Harris.
If Trump’s campaign does receive funds from Thiel, I expect the Trump-Vance administration to greatly increase the size and number of contracts awarded by the federal government to Palantir.
In Palantir’s fiscal 2023, the firm obtained $1.2 billion of revenue from governments, versus its total sales of $2.2 billion. Therefore, by significantly increasing Palantir’s revenue from Washington, a Trump-Vance administration could tremendously boost the company’s financial results.
A Huge Valuation and a Sharply Divided Street
On the valuation front, Palantir stock is changing hands at a huge forward price-to-earnings ratio of 87 times. Its price-to-sales ratio, which stands at 28.7 times, is no more appealing. In light of its exorbitant levels, I believe that most if not all of any boost it will get from a Trump-Vance administration is already baked into the shares.
Meanwhile, Palantir stock remains very controversial on the Street. In the 90 days that ended on July 22, a total of eight analysts issued “sell” or strong sell” ratings on the name. Four others gave the shares a “hold” rating.” Moreover, only six analysts placed a “buy” or a “strong buy” rating on the shares.
On July 16, Japanese bank Mizuho downgraded its rating on Palantir stock to “underperform” from “neutral.” The bank believes that the shares’ valuation is “hard to justify,” while the outlook of the company’s business is uncertain. Additionally, the bank believes the company has delivered “lower quality” earnings, Investing.com reported. Mizuho could be referring to the fact the company’s profits remain relatively low. For example, the firm’s first-quarter operating income came in at $81 million. That’s not a very high OI, considering we’re talking about a stock with a market capitalization of $63.4 billion.
Also noteworthy is that analysts expect Palantir’s earnings per share to climb to 33 cents this year and 40 cents in 2025 versus 25 cents in 2023. While the percentage increases are relatively high, a company with huge valuations only increasing EPS by just 7 cents or 8 cents annually is a bit unusual and disconcerting.
The Bottom Line
A Trump-Vance administration would likely wind up significantly boosting Palantir’s financial results. But given the huge valuation of Palantir stock, the skepticism about it from much of the Street, and the company’s relatively low profits, I wouldn’t be surprised if the shares drop sharply before the firm benefits from a Trump boost. And even if a change in the White House does provide Palantir with a positive catalyst, I believe the shares could already reflect that situation.
Consequently, I recommend that investors sell their shares of Palantir stock. If Trump wins the election with backing from Thiel, Palantir stock drops at least 15% and the company’s bottom line rises meaningfully more than expected, I would likely become more bullish on the shares.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
