Summary

• Palantir's price-to-sales ratio is the highest among companies with a $100 billion or more market cap. Its multiple is 5x that of Snowflake.

• Weak Q4 metrics, including declining RPO growth and sequential billings, raise concerns about Palantir's Q1 growth.

• High stock-based compensation, insider selling, and interest-inflating net income, further support my bear thesis.

• I maintain a short position on Palantir, due to overvaluation, weakening fundamentals, exhausted price action, and a potential Q1 sales miss.

Palantir’s Valuation Is In Another Stratosphere

It doesn’t take much research to see Palantir (NASDAQ:PLTR) has a high price to sales multiple. However, I need to briefly detail how expensive Palantir is to properly frame my analysis. The more expensive a stock is, the closer I look for flaws in its business metrics. If Palantir’s stock was trading at a multiple closer to the industry average and its growth rate, I would be more likely to give some weak results a pass.

With that being said, according to finviz Palantir has the 4th highest price to sales ratio among companies with a market cap above $10 billion. One of the stocks ahead of it, MicroStrategy, doesn’t really count because it is valued based on its Bitcoin reserves. Furthermore, Palantir has the highest price to sales ratio among firms with a market cap above $100 billion. According to finviz, its price to sales ratio is 99.1. The 2nd place firm isn’t even close. Arm Holdings is in 2nd place at just 45.7x sales (less than half Palantir’s multiple).

It’s exceedingly rare to see a triple digit price to sales ratio on a software stock unless the business is in its early stages, growing sales well over 100%. As you can see below, Y-Charts shows Palantir is at 106.6x sales, which is over 5 times Snowflake’s multiple. Palantir is set to grow sales at 34.8% in 2025 which is only slightly faster than Snowflake’s 28.1% growth rate. Palantir deserves a slight premium to Snowflake, which would give it around a 20x sales multiple, not 106.6.

Data by YCharts

When Snowflake used to trade at a triple digit price to sales multiple in late 2020, it was growing way faster than Palantir. In 2021, Snowflake grew sales 123.6%. With that elevated growth rate and a stock correction, the price to sales multiple quickly normalized. Since Palantir likely won’t grow sales that fast in 2025 or in 2026, most of the multiple compression will come from a stock price decline.

Weaknesses Within The Q4 Report

Palantir stock increased 24% the day after the firm reported its Q4 results. With that backdrop and the current high valuation, you would think the results were perfect. However, they were not. There were two important weak points. Firstly, year-over-year growth in remaining performance obligations (RPO) fell sharply.

As you can see below, growth had been accelerating from 13% in Q3 2023 to 59% in Q3 2024. In Q4, yearly growth fell sharply to 39%, signaling a potential decline in demand growth which might show up in sales in the future. The 2-year growth stack fell 5% from Q3. Specifically, short-term RPO was more of a weak point. Short-term RPO had 29.7% yearly growth, while long-term RPO growth was 50%. We shall see if this leads to weakness in Q1 sales growth. It’s notable that only 2 positive questions were asked by analysts on the call, so we didn’t get any color on this RPO growth weakness.

Author's Calculation

RPO growth wasn’t the only challenging KPI in Palantir’s Q4 report. Billings were down 5% sequentially. That was the weakest growth reading since Q3 2023 when billings fell 9%. If you’re curious, billings had been up 15% in the prior 2 quarters. In the past 4 years, the highest growth was 59% in Q1 2023 and the lowest growth was -24% in Q4 2022. These volatile rates mostly canceled each other out in that time period. The decline in Q4 2024 didn’t have a prior spike to cancel out.

Q1 Sales Miss Could Be Coming

The difference between sales and billings is called the change in contract liabilities. In going back to 2021, I found the change in contract liabilities on average predicted future quarterly sales growth.

In the excel sheet below, I put a green box around when there was a greater than $10 million increase in contract liabilities and a red box around when there was a decline more than $10 million. The green and red boxes in the 2nd column are one quarter later, since it’s a leading indicator. In the 7 quarters since the start of 2021 with a greater than $10 million increase in contract liabilities, the average subsequent quarterly sales growth rate was 7.14%. In the 4 quarters with a greater than $10 million decline, the average sales growth rate was 4.25%.

Author's Calculations

The 2 quarters with the biggest declines had among the lowest growth rates afterwards of just 1% and 3%. The quarter with the biggest increase had a 14% growth rate afterwards. These metrics support my thesis that the change in contract liabilities is a leading indicator for quarterly sales growth.

If Palantir has 4.25% sequential sales growth in Q1, it will miss the consensus of 5.66% growth. Palantir has beaten sales estimates in 7 of the past 8 quarters. A miss would likely catalyze a sharp correction since the price to sales ratio is so high. I would argue the firm needs to beat estimates significantly to justify continued momentum. I believe that’s unlikely based on the weakness in short-term RPO growth and the decline in contract liabilities. I expect sequential sales growth to slow from the 14% growth rate seen in Q4.

Stock-Based Compensation Is Too High + SARs

I’m very concerned with Palantir’s high stock-based compensation. Furthermore, the stock’s multiple is so high, a buyback won’t be able to offset dilution. For example, if the stock had a 20x sales multiple, which is about 1/5th of the current valuation, a $1 billion buyback would take out about 1.78% of shares outstanding. A $1 billion buyback, at this valuation, would only take out 0.36% of shares outstanding. The firm has $5.2 billion in cash/cash equivalents. It instituted a $1 billion buyback program in 2023. It only repurchased $64 million of shares in 2024.

Data by YCharts

As you can see from the chart above, Palantir’s stock-based compensation in the past year was $692 million, which is over double the firm’s EBITDA. To make matters worse, the firm also paid out $116 million in Stock Appreciation Rights (SARs). SARs are paid in cash, but they have a real impact on earnings. These SARs were part of the 2020 employee compensation plan, but grants didn’t start until Q1, 2024. 44,283 out of the 51,620 SARs that have been granted so far were given out in Q1 2024.

Most were exercised in Q4 2024 because the maximum appreciation for the market-vesting ones was a share price of $70. The 6,437 still outstanding are likely the time-vesting ones. The market-vesting SARs started vesting at $50 per share, which was way above the $17 share price at the start of 2024. They likely vested quicker than the firm anticipated, meaning employees got payouts after doing less work than expected.

I don’t like paying employees bonuses based on the stock price because short-term stock performance is likely unrelated to any individual’s work performance. They could be working on a project that won’t show results for a long time. I prefer granting shares/options, not cash, to employees if employee-specific metrics are hit. The stock price or market cap are a fine metrics for upper-level management like the CEO & CFO. I want granted shares/options to be locked up and rules preventing using shares/options as collateral to borrow against. This prevents short-termism and cashing out quickly.

Interest Gains Are A Huge Part Of Palantir’s Earnings

Palantir’s multiple of its trailing net income is stratospheric. The firm had $462.2 million in net income in 2024. With Palantir’s market cap at $283.8 billion, the stock trades at a trailing multiple of 614. To make matters much worse, 42.6% of the firm’s net income came from interest on its large cash pile. There’s nothing wrong with interest, but it doesn’t deserve an earnings multiple. You wouldn’t pay someone $2,000 for a $100 bond yielding 5%. If you take out the interest income, the stock trades at a net income multiple of 1,069 which is easily the highest multiple I’ve ever seen for a large cap.

Data by YCharts

Very High Insider Selling

Insiders know the most about a company. I like when a firm has high insider ownership and there has been recent insider buying. I get very worried when I see elevated insider selling. As you can see below, in the past year, the ratio of insider sells to insider buys is about 2.4:1. The ratio of sells to buys in the past 3 months is 2.7:1. Furthermore, the respective ratios for actual shares sold and bought in the past 12 months and 3 months are 2:1 and 1.1:1. This insider selling alone isn’t enough to be bearish, but it fits in nicely with the recent weakness in some metrics and the extremely high valuation.

Nasdaq.com

I Am Short Palantir

I personally have an elevated short position in Palantir. I have expressed that through shorting shares, not put options because I don’t trade options. I like shorting stocks that are expensive, have weakening fundamentals, and exhausted momentum. According to Seeking Alpha, Palantir stock has a relative strength index (RSI) reading of 81.1 which is near its 1-year high of 84.5. Extremely elevated sentiment can reverse course easily. It doesn’t take a major catalyst to shift momentum. Euphoric rallies are the most vulnerable to corrections. A sales miss in Q1 also could catalyze a decline.

Seeking Alpha

My short has no defined time horizon. I can add or subtract to the short position in the near-term depending on the price action in my portfolio and the stock. I’ll likely at least have some short position for the next few months unless the stock craters. I like that Palantir only has a short interest rate of 3.24%. I will never short a stock with above a 10% short interest to avoid a squeeze.

I like expressing my skepticism of retail investors’ recent overall market optimism through shorting Palantir. From February 5th to the 11th, Palantir stock had $339.7 million in net retail buying, which was the 3rd highest in the market. Palantir is certainly punching above its market cap weight, with Nvidia and Tesla receiving net buying of $579.1 million and $562.2 million in that same week.

How I Could Be Wrong

High SARs and stock-based compensation cost money and are dilutive, but they can also attract top talent to work at Palantir. Combined with the rising stock price, prospective employees have a large financial motivation to join the company. Obviously, stock prices are volatile, but it certainly doesn’t hurt to see record high prices constantly reported in the news.

Stocks with a high valuation can keep that valuation for longer than someone would normally feel comfortable with holding a short. I’m paying 10% interest to hold this short position. Generally, firms don’t maintain triple digit sales multiples for more than a few months. However, there’s nothing stopping Palantir from being an exception. It has already become the 38th largest company in the world. Its ascent has been among the quickest I’ve ever seen in my 17 years of following markets.

Either the firm could slightly beat its Q1 sales estimates, or a sales miss might not cause the stock to fall as much as I expect it to. One fairly unique aspect to Palantir’s estimates that makes the stock almost impenetrable is that analysts expect sales growth to sharply accelerate from 25.9% in 2026 to 35.4% in 2027. Usually, weak reports impact current year & next year’s estimates, but it’s hard to see what will impact 2027 estimates. If analysts have determined Palantir is the AI SAAS leader, they might stick with this elevated growth rate estimate even if sales modestly disappoint (especially if management maintains a positive tone). After all, we didn’t see any negative earnings revisions after the weak RPO growth and billings decline that I pointed out in this article.