Shares of Palantir Technologies (PLTR) are down 20% from the all-time high hit earlier this month as CEO Alex Karp plans to sell as many as 10 million shares of PLTR and the Defense Dept. plans to cut its budget by up to $50 billion.
Despite having hit it out of the park with its latest earnings report, in large part because of the strength of its government business, should investors use this as an opportunity to buy what has been termed the “best pure-play” AI stock? Some think so.
Palantir stock is moving slightly higher in pre-market trading Monday. While early morning trades are not much to go by because it is a rather illiquid market, it still gives a sense of the sentiment the market has. The early indication is PLTR stock has been discounted for no good reason.
Karp implemented a Rule 10b5-1 plan that allows executives to sell company stock at set intervals based on rules set forth in the plan. Yet 10 million shares at $101 a stub is $1 billion worth of stock.
Yet as investing legend Peter Lynch once noted, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Investors would do well to ignore insider sales as background noise, but perk up if they start buying.
Karp’s plan is a non-event, albeit a billion-dollar one.
On the government side of the equation, Defense Secretary Pete Hegseth announced the Pentagon would cut its $850 billion budget by 8%, or about $50 billion.
In a video message, Hegseth said “Beginning right away, we are pulling around 8%, or $50 billion, from [former President Joe Biden’s] budget plans…We will move away from woke, non-lethal programs and instead spend that money on President [Donald] Trump’s priorities for our national budget.”
This should not be seen as a risk to Palantir Technologies, but strengthening the argument for it. Hegseth said he wanted to move away from “the DEI, the woke, the climate change B.S.” and towards “building a lethal fighting force.”
Because Palantir was born out of providing data analytics for the government’s three-letter national security apparatus, its focus was always on mission critical operations. A military that’s once again focused on ensuring the U.S. will have the best equipment and information available to fight a war is a tailwind for Palantir, not a headwind.
With the government sector accounting for more than half of its revenue, a good case can be made Palantir Technologies will be seeing more contracts flow its way, not less.
Arguably the biggest concern for PLTR stock is its valuation. Even after a 20% haircut, shares still trade for 150 times next year’s earnings, 83 times sales, and over 200x the free cash flow it produces. It’s not a cheap stock.
The industry price-to-sales ratio for the software-infrastructure sector is just 5, meaning PLTR nearly 17 times the industry average. The average P/E ratio is 34. While Palantir’s profit margins are inline with its industry, it points to how elevated the stock is trading.
It seems clear, Palantir Technologies has a long runway of growth ahead of it, but investors might not want to dive back into the stock just yet.
