A crucial question for investors in Palantir Technologies (NASDAQ: PLTR) is: Among all the S&P 500 firms that have previously traded at a valuation similar to Palantir’s, how many actually generated profits for their investors?
The answer is very few.
The data analytics and AI firm is currently priced at approximately $155 per share, boasting a market cap of $370 billion. Last year, it reported revenues of $4.5 billion, translating to a price-to-sales ratio (P/S) of 87, making it the highest valued stock in the S&P 500.
This is not just a recent trend. Few companies in the index have ever achieved such a high P/S ratio. According to WisdomTree, only 231 companies have ever exceeded a P/S of 25, and only those that hit a P/S of 100—like Palantir—did so during the dot-com bubble.
WisdomTree’s findings reveal that of the 231 firms that attained a P/S of 25, only 21% outperformed the market in the following year, with a median loss of 36%. Over longer periods, only 9% surpassed the market over three years, and a mere 4% did so over 20 years.
Moreover, narrowing the list to those with a P/S of 40 shows grim prospects: only a few of the 148 companies in this category outperformed the market long-term, with just 3% succeeding over 20 years.
Despite Palantir’s impressive execution, the sustainability of its high valuation is uncertain. While it currently excels, challenges may arise in maintaining its distinctiveness as larger companies, like Microsoft, invest heavily in enterprise AI.
