With a market capitalization of $314 billion, Palantir currently ranks between Coca-Cola and Bank of America in the S&P 500, yet the company generated only about $2.2 billion in revenue in 2023. This corresponds to an enterprise value of more than 70 times the revenues projected for this year, a valuation that, according to an analysis by Trivariate Research, has rarely occurred in the past two decades.

The numbers seem disconnected from reality. The price-to-earnings ratio (P/E) based on the last twelve months is 565, the forward P/E is 228. Even more remarkable, however, is the multiple on a revenue basis: In a trivariate screening series with 2,000 established US companies (non-financial) since 2000, only six cases with higher EV-to-sales ratios were identified – almost exclusively biotech speculations or special cases like MicroStrategy.

The historical record of these high valuations is sobering. Stocks such as Bluebird Bio, FuelCell Energy, or Comverse Technology subsequently saw price declines of up to 99 percent or disappeared entirely from the market. Even the few exceptions like Cheniere Energy only recovered after years.

Statistically speaking, the trend is clear: Companies valued at more than 30 times revenue based on forecasts performed on average 22.5 percent worse than the S&P 500 in the following year. The valuation level itself halved on average to 18 times revenue.

Part of the declines is due to multiple compression – the other part to disappointed growth expectations. Often, overvaluation is based on strong prior year growth: on average, revenues increase by 45 percent in the year of entry. The following year, growth falls to 28 percent – which is not enough to support the valuation.

Trivariate indicates that Palantir is more than three times more expensive than the next-ranked company (excluding MicroStrategy) while not exhibiting exceptionally strong growth. In many segments, there are cheaper alternatives with similar or even better dynamics. This makes the stock a challenge from the perspective of active large-cap managers, especially with regard to the upcoming reweighting in the S&P 500 at the end of the quarter.