I Really Want to Invest in Palantir Technologies. Here's Why I Won't.

Every so often in an investor's life, there will be a stock that you really want to own, but that you shouldn't buy. If you lack significant investment experience, or considerable willpower, you may be inclined to purchase the asset, potentially leading to future regret.

For me at the moment, the stock I'm wishing I held in my portfolio is Palantir Technologies (NASDAQ: PLTR). Here's a look at why I'm interested in it -- and why I'm not buying it.

Image source: Getty Images.

Why do I wish I were a Palantir Technologies shareholder?

There are several reasons why I'm wishing I owned Palantir Technologies. For starters, it's been a phenomenal performer in recent years, and it's likely to keep growing, though perhaps at a slower rate as it becomes a bigger company. Check out its impressive trailing returns:

Data source: Morningstar.com, as of Nov. 25, 2024.

Eye-popping, right? It's worth noting that the company went public via an initial public offering (IPO) in only 2020, so it hasn't been around that long, and it posted losses instead of gains in both 2021 and 2022. Still, performances like those in its last two years are hard to resist.

Here's another tantalizing aspect of Palantir: It's in an exciting business, specializing in artificial intelligence (AI) software used by both businesses and governments to help them make better decisions. It appears to have a lot of room for growth, having a revenue run rate of about $3 billion annually and having estimated a total potential market of $119 billion back in 2020. (You're probably drooling over this stock, too, I bet.)

Why I'm not buying: It's outside my "circle of competence"

So why am I not buying? Well, one excellent reason to not buy is simply this: I am not an AI expert. I'm a long-term investor, aiming to hold onto my great stocks for years if not decades, but I don't have a good grasp of where Palantir will be in the future.

Warren Buffett has said that when investing, he respects his "circle of competence" and doesn't stray outside it, preferring to invest in companies he understands. Do I understand exactly how Palantir makes its money? No, I don't. Do I understand which kinds of companies are likely to fare best with AI technologies? Nope. Do I know which companies compete most directly with Palantir and what its strengths and weaknesses are? Negatory.

To be sure, I could spend more time learning a lot of this. But right now, Palantir is well outside my circle of competence.

Why I'm not buying: It's expensive!

Here's the main reason I'm not buying shares of Palantir Technologies: They simply seem way too expensive!

Here are a few valuation numbers for Palantir:

• Its price-to-sales ratio was recently 58.8, well above its five-year average of 15.9 and even more above the overall U.S. market's recent number of 2.9.
• Its recent forward-looking price-to-earnings (P/E) ratio of 139.9 is well above its five-year average of 72.3.
• Its price-to-earnings (P/E) ratio, recently 323.3, is more than 12 times greater than that of the overall U.S. market.
• Its PEG ratio, relating its growth rate to its valuation, was recently 4.55, with a score of 1 traditionally suggesting a reasonably valued stock.
• Its market capitalization, the value of all its shares, was recently near $150 billion -- while it is just raking in $3 billion annually. That's kind of steep.

It can help to put things in perspective by looking at some other companies. Consider that Nvidia, another market darling, recently sported a market cap of $3.3 trillion -- and a forward P/E of just 32.3. Amazon, another impressive long-term tech grower, recently had a market cap of $2.1 trillion and a forward P/E of 32.8.

That price tag of $150 billion for Palantir also looks sky high when you consider that it's higher than, say, Pfizer, which rakes in $59 billion annually and has lots of room to grow. That $150 billion is more than the market values of Target (recently $58 billion), Ford Motor Company ($44 billion), Southwest Airlines ($19 billion), and Best Buy ($19 billion) -- combined.

Sure, Palantir may well be on its way to a valuation of $300 billion -- and after that, perhaps $3 trillion. But paying, at recent levels, $323 for every dollar of its current earnings, or paying almost $59 for every dollar of revenue is quite a steep price, with absolutely no margin of safety and no room for error.

Those who buy Palantir now may indeed do well in the long run, but they may also end up seeing their shares fall sharply before doing so. (Indeed, multiple billionaires have been selling their shares recently.)

What I'll do instead

So now what? What am I going to do about Palantir? Well, I'm putting it firmly on my watch list. That way I won't forget about it, and I may notice if it falls into more attractive territory.

I'm not as brilliant an investor as Buffett, but like him, I do try to invest in companies I understand and stocks that seem to be undervalued, not trading at astronomical levels.

Should you invest $1,000 in Palantir Technologies right now?

Before you buy stock in Palantir Technologies, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $829,378!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of November 25, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian has positions in Amazon, Nvidia, and Pfizer. The Motley Fool has positions in and recommends Amazon, Best Buy, Nvidia, Palantir Technologies, Pfizer, and Target. The Motley Fool recommends Southwest Airlines. The Motley Fool has a disclosure policy.