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Saying Palantir (NASDAQ:PLTR) shares are overvalued as a result of the price-to-earnings (P/E) ratio is 424 is – I believe – a mistake. It’s like saying somebody can’t climb Everest as a result of the mountain is huge.
Somebody’s means to get to the highest of Everest is determined by their mountaineering abilities. And the worth of Palantir’s inventory comes right down to its future development prospects – which I believe are excellent.
Valuation
There’s extra to valuation than P/E ratios. Don’t consider me? – right here’s Warren Buffett within the Berkshire Hathaway Annual Shareholder Letter from 2000:
“Common yardsticks such as dividend yield, the ratio of price to earnings or to book value have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the underlying business.”
This isn’t to say the P/E ratio is irrelevant (in the identical manner the peak of Everest isn’t irrelevant to the query of whether or not or not somebody can climb it). But it surely isn’t the one factor that issues.
In the end, the worth of a inventory comes right down to how a lot money the corporate goes to make and when it’s going to make it. That’s as true of Palantir as it’s of anything.
The equation
Proper now, Palantir has a market cap of round $190bn and a 10-year authorities bond comes with a yield of 4.5%. So to justify its present valuation, the enterprise must make round $86bn by 2035.
That’s $8.6bn per yr and the corporate managed simply over $462m in 2024. Meaning there’s plenty of rising to be performed, which might be inferred from the P/E ratio.
To generate $86bn by 2035, Palantir goes to need to develop its earnings by over 50% per yr. Once more although, this solely provides an thought of the dimensions of the problem.
It’s huge, however it isn’t inconceivable. Simply as an impressive mountaineer can climb Everest, an distinctive enterprise can obtain that development – the query is whether or not or not Palantir is phenomenal sufficient.
Palantir’s prospects
There’s a mountain to climb, however I discover it exhausting to think about a enterprise with higher prospects for doing it than Palantir. It gives actual worth to prospects and an enormous addressable market.
Throughout 2024, the corporate signed up corporations from bottled water producers to insurance coverage brokers. And within the final three months alone, it introduced on one other 82 new prospects.
In consequence, US business revenues grew 64% within the fourth quarter of 2024. And there’s at the moment no seen competitor in sight, which is why CEO Alex Karp thinks there’s a long time of development forward.
That’s to not say there are not any dangers in any respect. The corporate acknowledges that the rise of synthetic intelligence is prone to elevate regulatory and authorized challenges and buyers can’t simply ignore these.
Silly takeaways
It’s not clear to me whether or not or not Palantir shares are good worth proper now and there are different alternatives the place I believe that is extra apparent. So I’m specializing in different investments for my portfolio.
One factor I am clear on, although, is the concept a excessive P/E a number of means the inventory is overvalued is way too simplistic. With any shares, the query of worth comes right down to the underlying enterprise.