Palantir Stock is Leaving NVIDIA in the Dust
First, let me be crystal clear…
The long-term prospects for NVIDIA (NVDA) are incredible. The stock is the single leader in the AI Chip industry. But to put it simply, the “discovery phase” for this stock is complete.
NVIDIA will continue to grow, but due to the Law of Large Numbers (revenue specifically) and the fact that the stock is over-loved by investors, Palantir (PLTR) is set to claim the crown for performance over NVIDIA for the foreseeable future.
Palantir has done it, for now. The stock has doubled NVIDIA’s performance for 2024. A year ago it was a feat that many of my readers turned a skeptical eye to, but the numbers don’t lie.
For the year, Palantir has now returned more than 350% compared to NVIDIA’s 175% gains, doubling the AI chip giant’s performance.
Palantir’s outperformance signals the shift from AI development to application as companies like Palantir, IBM, Salesforce and others are now harnessing the power developed by NVIDIA to generate profits for companies large and small.
We’re in the beginning stages of this profit shift, meaning Palantir still has room to run higher.
The Underdog is Now Performing
Palantir, the company marked as somewhat of a failure by Wall Street began to emerge from a long-term bear market trend.
The company had launched for trading in mid-2020 and immediately went up more than 300% as the market focused on two things, AI and big data.
Palantir offered the powerful combination of the two factors that Wall Street was quickly jumping over itself to invest in, resulting in a fast love affair with Palantir shares.
As a bonus, Palantir posted positive earnings in their first quarter as a publicly traded company. That also set the stage for heightened expectations for the stock.
The “honeymoon” was short-lived as Palantir followed their first quarter profits with a second quarter loss that surprised Wall Street and investors.
Shares initiated a two year, 87% decline in value, accelerated by the bear market of 2022.
Now, with positive revenue and earnings growth driven by a stream of new contract business, Palantir has matched the performance of AI darling NVIDIA over the last 12 months.
From my perspective, Palantir is still set to outperform NVIDIA over the next 12 months.
Wall Street Hates Palantir, that Will Change
“Stocks climb a wall of worry”.
Most investors have heard it but they don’t want to understand how it can propel a stock higher.
The best way to portray Palantir’s Wall of Worry is with a chart of the current analyst recommendations for the stock.
Currently, 19% of the Wall Street analysts recommend shares of Palantir as a “buy”. Let’s just give you the raw number, it’s 3. Despite Palantir’s great performance, only 3 analysts rate the stock a “Buy”.
Just compare that to NVIDIA’s 48 buy recommendations.
The situation creates a problem for NVIDIA and an opportunity for Palantir due to the “Wall of Worry”.
Palantir is emerging as a different company than it was a year or two ago.
Earnings per share and revenue are consistently beating analyst expectations. In addition, Palantir’s management is now issuing forward-looking guidance that is better than Wall Street’s expectations.
Put simply, Wall Street is on the wrong side of the Palantir trade, which is likely to help shares over the next 6-12 months.
In November, Alex Karp, CEO of Palantir, was interviewed on CNBC and the subject of Wall Street’s expectations came up.
The CEO expressed the relationship between Wall Street and Palantir with this quote…
“People have been saying we are overvalued for 20 years. People have been saying our products wouldn’t make us profitable. That we would not be able to become a juggernaut. That we would not become GAAP profitable. That we wouldn’t get on the S&P. Keep saying that about us. We love it. It discourages people from doing anything like what we’re doing. And we are winning.”
He’s right, Palantir is winning.
What Happens from Here
Wall Street is playing a game of Chicken with the stock.
Investors point to the company’s forward P/E Ratio of 172 and scream that the stock is overvalued at its price.
This is one of the flaws with Fundamental analysis, it doesn’t account for explosive growth. Just ask early investors in Amazon, Google or Facebook that held these stocks through similar “overvaluations”.
The valuation argument would carry water if Palantir were a late-stage growth company like Apple, but it’s not.
Perhaps this is a Ponzi scheme, a “cult” as it has been referred to as, but if the company begins to monetize the contracts that they have been stacking-up in the “completed” file during 2024, the valuations will make sense.
And that’s When Wall Street Will Capitulate
Alex Karp is right to point out the disparity between Wall Street’s outlook and Palantir’s price. One will have to move to the other, and right now Wall Street is being left behind.
For the third quarter in a row Palantir’s management has raised their guidance. That’s a trend.
The improved view of the company comes as they continue signing contracts with the public and private sector, exactly as the company planned.
Expect to see Wall Street adjust their view on the stock over the next two months, ahead of Palantir’s next earnings call on February 12.
One thing that is a sure as the sun is coming up, Wall Street analysts like to move as a group. When a few analysts blink to upgrade the stock, the rest will start to follow.
That shift in sentiment will push Palantir shares higher up the “wall” as more and more investors start piling into the stock.
Newly minted highs of nearly $85 per share will be far in the rearview mirror as Palantir strikes its way towards a price target of $100 and then $125. All thanks to Wall Steet’s shift to being buyers of the stock.
How to Trade it
As always, the simplest trade here is a buy and hold strategy.
Palantir shares are likely to continue outperforming companies like NVIDIA, Microsoft and Google over the next 2-5 years as AI services are now harnessing the power of AI created by those companies.
Options investors may consider using a LEAPs strategy to leverage the expected move.
January 15, 2027 calls remain relatively inexpensive and a simple way to diversify a long-term AI portfolio for those with the education and background to trade options.
— Chris Johnson
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Source: Money Morning