Software juggernaut Palantir just fell to earth: Is it a buy?

The world's hottest software stock just slumped 15% in two days, but many investors still back Palantir as a massive wealth creator over the next decade. 

The Nasdaq-listed software sensation develops artificial intelligence (AI) products that help the US government and large corporate clients cut costs, grow sales, and improve productivity.

Its supporters argue it's exceptional as it offers a model of embedding software engineers into clients' workplaces to tailor specific AI solutions for the business, rather than offering commoditised AI solutions that are widely replicated across corporates already.  

Valuation 

The market's belief in its exceptionalism and growth outlook pushed the stock to a record high of US$125.41 on Wednesday, before it fell to $106.21 on Thursday, amid profit taking and worries about US government spending cuts. 

But even at its reduced US$241 billion valuation the stock isn't going to smoke out value investors. It still trades on 150 times the mid-point of guidance for adjusted free cashflow between US$1.5 billion and US$1.7 billion in 2025, or 64 times guidance for sales between US$3.74 billion and US$3.76 billion.

Local fund manager and head of long-short strategies at Plato Asset Management, Dr David Allen, acknowledges this business isn't for everyone, but reckons it may still work as a long-term wealth compounder. 

"It's definitely expensive there's no two ways around that," said Allen. "But that doesn't mean it won't continue to go up and we still own it." 

"It has a model of forward-deployed engineers where they embed them into the company and rather than producing a brand new bespoke piece of software from scratch, they've got highly configurable software that can do a range of different things and the great advantage in that is their time to execute is measured in months, rather than years."

Allen adds that - like it or not - Palantir's closeness to the administration of US President Trump is an advantage over the next four years at least, although it already has a long track record of success with the US government.

"When Covid started they [Palantir] went to the US govt and basically piped in and integrated all these different data systems and provided analytics in a matter of weeks."

In the private sector, Palantir's Artificial Intelligence Platform also helps Rio Tinto (ASX: RIO) run its 53 driverless trains with 240 wagons each in an efficient and cost effective basis. While it says the software it embedded for Airbus helped it increase the production rate of its flagship Airbus A350 aircraft by 33%. 

It's also worth noting the frothy valuation isn't the only controversy floating around Palantir. Chief executive Alex Karp and co-founder Peter Thiel aren't everyone's cup of tea. Thiel has some non-mainstream views that may upset some, while Karp said staff can leave his "software juggernaut" if they don't like his pro-Israel views. 

Buy, sell, hold?

So all things considered, is the stock a buy after its 16 per cent sell-off? Wall Street's split on the question. 

According to Dow Jones, eight out of 26 professional analysts rate the stock a buy, with 13 a hold, and five a sell. The median price target is US$97 per share.

After Palantir's latest quarter, Morgan Stanley said "valuation remains the primary concern" with a US$95 price target.  

Cantor Fitzgerald valued the stock at US$98 on an estimated 50x enterprise value to forecast revenues in 2026 in stating its view that "Palantir is a leader in AI... early in its journey of transforming industries and governments." 

Elsewhere, there's no doubt price-following retail investors love the stock's momentum and story of alignment to realpolitiks and the disruptive potential of artificial intelligence. 

Allen says Plato beat the retail crowd to the business by a long way and first bought shares in 2021, with the valuation never cheap given it's surged 1,054% over just the past five years.  

"It's not like you're ever going to pick up a company like this for a bargain," he says.

"Their growth in terms of the commercial and government space is huge. Their 60 largest customers spend US$20 million each and this is a real product disrupting in many ways how big tech projects are done, so I think there's a big future for them ."

Thanks to bets on the likes of Palantir, Nvidia, Amazon, and AppLovin, Allen's Plato Global Alpha hedge fund gained 46.4% net of fees for the 12 months to January 31 and has returned a compound 24% net of fees since inception in September 2021. Whether Allen's right to hold Palantir from here remains to be seen. 

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