Palantir Technologies Inc. rose 3% in premarket trading.
Investor enthusiasm about Palantir Technologies has driven the stock to sky-high valuation metrics.
At Tuesday's close, Palantir was trading at 67 times its sales over the last 12 months. The S&P 500 index trades at 3.2 times sales. History suggests Palantir's stock could be peaking, at least in the short to medium term.
We have seen this type of extended valuation before, especially during the 1999-2000 dot-com boom, and during the Covid pandemic era of 2020-2021.
Amazon.com, an early dot-com darling, reached a price-to-sales peak of 66 times in 1999. Three years later, shares were down 88% amid concerns of retail weakness in a recession and about profitability -- Amazon wouldn't show a profit until 2003. But Amazon sales never shrank, with growth bottoming at 13% in 2001, and rebounding strongly the next year. The Amazon bulls of 1998 and 1999 were eventually proven correct; by 2005, Amazon shares were up 278% from three years earlier.
To be sure, focusing on Amazon biases the view toward the survivors of the dot-com bust. E-commerce sites like Pets.com and Webvan weren't as fortunate.
More recently, during the pandemic, a number of stocks reached Palantir's kind of valuation. With office workers logging in from home, Zoom's videoconferencing became one of the early winners of 2020. That year, Zoom's stock price peaked at 178 times sales. The company's revenue rose by more than 300% annually at the Covid peak. But sales growth slowed as workers went back to the office, and new competition emerged from productivity software providers like Microsoft and Alphabet's Google. By 2022, Zoom's sales growth was down to single digits. The stock was down 86% three years after its 2020 peak price-sales moment. Despite a recent rally, the stock is still off 83% since then.
Another sector that thrived during the pandemic was information security software, a group that included once red-hot Zscaler. Its revenue grew by 56% in fiscal 2021 and 62% in 2022. Zscaler Inc.'s price-sales ratio peaked at 74 in 2021. Though growth remained strong in 2023 and 2024, Zscaler has still struggled to show a profit, with a -5% operating profit margin in the past four quarters. Three years after Zscaler stock's 2021 peak, the price was down 45%.
The pandemic was also wind in the sails of e-commerce names like Shopify, which saw revenue rise by 88% in 2020, giving the company a profit for the first time in its history. Its price reached 74 times sales that year. But as the pandemic wound down, sales growth slowed. That profit disappeared in 2022. Three years after its price-sales ratio peaked, Shopify shares were down 48%. A stronger 2023 and a return to profitability has driven a recovery, with shares now off only 11% from the peak price-to-sales.
Cloud names also saw extended valuations during the pandemic, so much so that Snowflake had a 268 price-sales ratio in 2020 on the back of triple-digit growth into fiscal 2022. But that growth didn't translate into profits. Snowflake had a -33% operating profit margin in the last year. Three years from its price-to-sales high, Snowflake stock was down 51%. Its lost more ground since.
This is all history, and as the frequent disclaimer says, past performance is no guarantee of future results. Among current Palantir peers, Constellation Software, Inc. may be the best fit. Both companies make software for governments and private customers. In their latest quarters, both companies' sales grow by more than 20%, Palantir with the edge. Both companies have operating margins in the midteens with Palantir a little better here, as well.
By sales, Constellation is the larger company, with 3.5 times the revenue of Palantir, but by market value, Palantir is 2.6 times larger. Palantir stock trades at 67 times sales, while Constellation fetches seven times sales. The wide valuation gap suggests Palantir's stock may be overextended. History suggests the same, at least over the next three years.
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