Price-to-sales ratio exceeds 70! Such a speculative stock usually ends poorly, can Palantir be an exception?
Since the beginning of this century, only 6 American companies have had a price-to-sales ratio exceeding Palantir's current level, and most of them ended up poorly. Analysts believe that although Palantir may perform well in terms of fundamentals, no company has been able to achieve fast enough growth to justify such a high valuation
When a company's price-to-sales ratio (market value/expected sales) reaches 70 times, history shows that there are only two possibilities: either it is the next world-changing tech giant, or it is a bubble about to burst. The American big data analytics company Palantir is currently standing at this dangerous crossroads.
The latest report from research firm Trivariate Research reveals a shocking fact: Palantir has become one of the highest-valued large-cap stocks in U.S. history. Founded by former hedge fund manager and former Morgan Stanley chief U.S. equity strategist Adam Parker, the firm rarely focuses on individual stocks, but when they do, the data is always impressive.
Palantir's current market value of $314 billion places it among the top 30 constituents of the S&P 500 index, sandwiched between Coca-Cola and Bank of America. Its price-to-earnings ratio is already crazy enough—static P/E ratio at 565 times and dynamic P/E ratio at 228 times.
A price-to-sales ratio of 79.9 times is even crazier. According to Trivariate's screening data of 2,000 mature U.S. non-financial stocks, which dates back to the early 2000s, only 6 U.S. companies have ever had a price-to-sales ratio exceeding Palantir's current level, namely:
"Bitcoin holder" Strategy (MSTR, formerly MicroStrategy), vaccine giant Moderna, gene therapy giant bluebird bio, biopharmaceutical giant Alnylam Pharmaceuticals, energy giant Cheniere Energy, and communications giant Comverse Technology.
Most companies on this "death list" ended up poorly:
Comverse Technology went bankrupt in 2013, and its CEO was imprisoned in 2017 after fleeing for over a decade; Bluebird Bio was privatized this week for less than one-fifth of its 2019 valuation; Moderna has fallen 94% from its pandemic peak.
Historical experience tells investors: a price-to-sales ratio of 70 times for a company has never been normal. In most years, mature U.S. stocks reaching a price-to-sales ratio of 30 times has almost never occurred
The Logic of Bubble Reenactment
Extremely high forward-looking valuations only appeared during the internet bubble period and the "free money" era during the pandemic. Last year was an exception: Soundhound AI and Astera Labs entered the 30x price-to-sales ratio club in December, but by early April this year, their value had shrunk by 60%.
Data from Trivariate shows that U.S. stocks that reached a 30x expected price-to-sales ratio underperformed the S&P 500 index by an average of 22.5 percentage points in the following year, with the final price-to-sales ratio only being 18x. This regression in valuation is due, on one hand, to the compression of valuation multiples, and on the other hand, to downward adjustments in expectations.
To find similar cases, one must trace back to 2000, when the price-to-sales ratios of network equipment and software manufacturers often reached triple digits. The Parker team listed the five stocks with the highest price-to-sales ratios during the internet bubble—Ariba, Brocade, Juniper, Verisign, and Tibco Software—based on historical revenues rather than expected data, all of which ultimately did not end well.
The Parker team believes that Palantir resembles a "single-stock bubble." Its valuation is more than three times that of the next most expensive company (excluding MicroStrategy), and it is expected to achieve unprecedented sales growth; however, its actual performance is not superior to those companies with much lower valuations.
The Testing Moment of Index Rebalancing
The Parker team points out that the rebalancing of the S&P 500 index at the end of June will increase Palantir's index weight, pushing it above the large-cap threshold, which will force active managers to conduct rational assessments.
Trivariate Research noted in its report:
Palantir may be fundamentally excellent, but we do not know. What we do know is that no company can grow fast enough to justify this valuation, and according to market consensus expectations, many companies have faster growth prospects. It is hard to imagine that this stock, which is about to enter the index, looks attractive to large-cap portfolio managers who are about to conduct new research.
The market will ultimately test whether this historic valuation is reasonable, and historical data seems to have already provided an answer
