Is This New S&P 500 Stock a Sell After a 161% Surge?

It was a memorable year for shareholders of a data analytics and artificial intelligence (AI) software company. Palantir Technologies (NYSE:PLTR). The stock has surged more than 160% in the past year, and the committee that selects companies worthy of membership in the S&P500 added it to the large-cap benchmark this month. Inclusion in an index is a badge of honor that recognizes a company’s strong performance and raises investor awareness.

Palantir’s products, particularly its AIP platform, drive accelerated revenue growth and strong profitability. However, the stock price has grown faster than the underlying business. Should shareholders consider selling while they’re ahead, or does Palantir have more room to maneuver?

The stock has surpassed the company

I’m not here to pick on Palantir’s business. There is plenty to be excited about.

The company has arguably become the leader in AI software on Wall Street. Last year, the company launched the AIP platform as a tool for businesses to develop and deploy bespoke AI applications, and its revenue growth has continued to accelerate since then. Technology consulting company Forrester Search recently recognized AIP as the best AI and machine learning platform on the market.

And yes, its inclusion in the S&P 500 likely generated some buying momentum for the stock. Funds that track the S&P 500 must add Palantir shares to mirror the index, and many investors turn to S&P 500 companies because they must meet strict standards to enter the index.

The problem is that the stock price gains have far outpaced the company’s growth. Palantir’s trailing 12-month revenue increased a total of about 16%. The stock’s appreciation increased nearly 10-fold.

PLTR Earnings Data (TTM) by YCharts.

How much does Palantir cost?

In reality, stock prices at any given time strongly reflect the market’s level of enthusiasm for that stock. Part of investing is recognizing when the market is too excited or pessimistic.

Right now, market sentiment towards Palanir is bordering on frenzy.

Do you remember the “everything bubble” of 2020-2021, when zero percent interest rates and monetary liberalization fiscal policies put in place to keep the economy stable during the pandemic crisis fueled a speculative bubble in growth stocks, cryptocurrencies and other assets? Although major stock indexes are once again hitting new all-time highs, many growth stocks are still trading at fractions of the valuations they reached at the peak of this bubble.

Still, based on price-to-sales (P/S), Palantir is approaching the highest valuations it had during the bubble.

PLTR PS ratio data by YCharts.

Analysts estimate that the company will generate $2.76 billion in revenue in 2024 and $3.32 billion in 2025. The stock is trading at a forward P/S of 25 based on the company’s revenue estimates. next year. If the stock ends up settling at a long-term P/S ratio somewhere in the middle of this wide range — say, 15 times revenue — its chart could remain flat or decline for years as the company is growing enough to catch up. the share price.

Should investors sell Palantir?

Palantir’s valuation has arguably entered bubble territory, and a number of factors could lead to that bubble bursting. There is political uncertainty as the US elections approach. Geopolitical tensions are flaring in Europe and the Middle East. Now that U.S. inflation has been largely brought under control, the Federal Reserve has begun cutting interest rates, which should boost the economy. But when such a recovery is necessary, it is sometimes because the country is heading into a recession.

Stock market bubbles can also burst on their own. Remember, high valuations create high expectations. Palantir’s stock could continue to rise until the company inevitably fails to meet the incredibly high standards that the market has priced into the stock. Once that happens, the resulting correction could be brutal.

In other words, stock market bubbles are like a game of musical chairs. They always end up eventually.

For investors, selling winning stocks while they’re still winning is difficult, and anyone who bought Palantir as recently as the last few months is probably sitting on fantastic gains and feeling good. But selling some stocks to lock in your gains could be wise. Otherwise, you might regret it when the music stops.

Should you invest $1,000 in Palantir Technologies right now?

Before buying Palantir Technologies stock, consider this:

THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now…and Palantir Technologies was not one of them. The 10 stocks selected could produce monster returns in the years to come.

Consider when Nvidia made this list on April 15, 2005…if you had invested $1,000 at the time of our recommendation, you would have $743,952!*

Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor the service has more than quadrupled the return of the S&P 500 since 2002*.

See the 10 values ​​»

*Stock Advisor returns September 23, 2024

Justin Pope has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool has a disclosure policy.