Key Takeaways:
- The 2-Minute Valuation Model values Palantir at $32/share in 2 years.
- This implies that the stock could have over 50% downside from its current share price.
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What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
The 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Palantir Looks Overvalued
Forecast
On Palantir’s Analyst Estimates tab shown below, you can see analysts expect Palantir to grow revenue at a 23.1% compound annual growth rate over the next 3 years, with normalized earnings per share, or EPS, expected to grow at about the same rate:
View Palantir’s full analyst estimates >>>
For context, over the past 5 years, Palantir’s revenue grew at a 30.3% CAGR.
Valuation Multiple
Palantir currently trades at around $71 per share, which means the stock trades at nearly 45 times next year’s expected revenue and 146 times next year’s expected earnings. This is a rich valuation.
Palantir has averaged a 94x forward P/E multiple since the company went public:
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We’ll use a 45x P/E ratio in our valuation, since the stock is expected to see about 20% annual revenue growth.
Fair Value
3 years from now, Palantir is expected to reach about 71 cents in normalized EPS. At a 45x NTM P/E multiple, that values Palantir stock in 2 years at $32/share.
The NTM P/E multiple uses the next twelve months’ expected earnings, so a 2-year valuation uses 3-year EPS forecast figures.
With the stock trading at about $71 today, this implies that Palantir could decline by 32.9% per year over the next 2 years, or 55% in total, to reach this fair value:
Palantir stock could definitely keep going up and up, and a $32 valuation could certainly be too low.
But it’s important to remember that the stock currently trades at 146 times forward earnings. This is an enormous multiple, especially for 20% annual forecasted revenue growth.
Analysts also think the stock is considerably overvalued.
Analysts’ Price Target
The consensus analyst price target for Palantir today is about $38 per share. Since the stock trades at $71 today, analysts also think the stock is considerably overvalued.
Analysts haven’t always been bearish on Palantir. You can see that analysts thought Palantir was undervalued throughout 2022, but today, they think the stock is at one of its most overvalued points in its publicly traded history:
Analysts’ price targets can suffer from many biases and aren’t always accurate.
Still, looking at analysts’ consensus price target can be a great way to get a “second opinion” on your own stock valuation.
TIKR Takeaway
Based on the 2-Minute Valuation Model, it looks like Palantir stock is well overvalued today, and the stock could decline over 50% in the next 2 years.
Don’t take our word for it—try it out for yourself! Analyze Palantir stock or any stock you’re interested in on TIKR today!
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
