To The Moon

$NVIDIA(NVDA)$ $Palantir Technologies Inc.(PLTR)$

Market Update: Mixed Results in the S&P Today S&P performance reflects mixed results, with notable declines in prominent stocks like Nvidia, down 5%, and Palantir, down over 6%. Over the past five days, however, Nvidia remains up nearly 3%, while Palantir has dropped more than 8%. This aligns with broader market trends, particularly given Nvidia's forward P/E ratio of 32 compared to Palantir's steep 150+.

Nvidia's Decline: Key Factors

Limited AI Updates: During the CES keynote in Las Vegas, CEO Jensen Huang introduced new gaming graphics cards and partnerships. However, the lack of substantive updates on Nvidia’s next-gen AI processors, "Blackwell," disappointed investors.

Broader Market Trends: Positive economic reports, including increased job openings and accelerated business activity, drove bond yields higher. Higher yields often shift investor preference toward bonds, negatively impacting tech stocks like Nvidia. Other notable declines include Amazon (-2%), Meta (-2%), Tesla (-4%), and Microsoft (-1%).

Despite today's dip, Nvidia is still up 172% this year, outperforming the S&P over the past decade. It remains near the high end of its 52-week range, and Wall Street maintains a strong buy rating with price targets exceeding $200.

Valuation Insights

Growth: Nvidia is projected to achieve double-digit EPS growth over the next four quarters, with a forward P/E of 33—below its 5-year average of 42.9. This suggests potential undervaluation despite trading at a premium compared to the sector.

Profitability: Nvidia boasts strong margins, with gross margin at 76% (sector average: 51%) and net margin at 56% (sector average: 3.8%). Its cash flow generation is equally impressive at $59 billion versus the sector median of $100 million.

DCF Model Results: Based on discounted cash flow (DCF) analysis, Nvidia’s intrinsic value ranges from $134 (5% downside) to $239 (70% upside), depending on assumptions. At a medium rate, the valuation indicates a fair price of $180, with a 27% upside.

Analyst Consensus

Wall Street: Strong buy ratings, with a consensus price target of $177, indicating 26% upside over the next year.

Others: While Seeking Alpha and quantitative models suggest a hold, Nvidia's robust growth and profitability metrics (A+ ratings) reinforce its long-term appeal.

Palantir: Analysis of Today's Decline and Long-Term Potential

Palantir shares dropped over 6% today, despite having significantly outperformed the S&P over the past year with a staggering 327% gain. The stock remains near the upper end of its 52-week range but currently carries a "hold" consensus from analysts. Let’s explore the reasons for today's decline.

Key Drivers of Palantir's Decline

Analyst Downgrade: Morgan Stanley initiated coverage with an "underweight" rating, citing concerns about Palantir's valuation following its substantial rally in 2024. The analyst suggested that the current price already factors in anticipated success, leaving limited upside potential.

Profit-Taking: Cathie Wood's ARK Invest sold approximately $15 million worth of Palantir shares (197,000 shares across various ETFs). This signals that some institutional investors are capitalizing on prior gains, adding to concerns about valuation.

Valuation Concerns: Palantir trades at a forward P/E of 159, far above industry norms. This high multiple has raised questions about its ability to sustain growth and justify the premium valuation.

Growth and Profitability Metrics

Despite these concerns, Palantir has shown impressive growth:

Earnings Per Share: Projected to grow at double-digit rates over the next four quarters. Historical performance has either met or exceeded expectations.

Revenue Growth: Year-on-year revenue increased by 24% (sector average: 4.2%), with forward-looking growth at 22% (sector average: 5.6%).

Profitability: Gross margin stands at 81% (sector average: 51%), and net margin is 18% (sector average: 3.8%). Additionally, Palantir generates nearly $1 billion in cash from operations, well above the sector median of $100 million.

However, these metrics may not fully justify the current premium. Palantir trades at a 676% premium relative to the sector based on valuation metrics.

Valuation Analysis

Our DCF analysis estimates Palantir's intrinsic value as follows:

• Moderate Growth (35%): $59 per share, representing a 16% downside.

• Conservative Growth (30%): $45 per share, indicating a significant downside.

• Optimistic Growth (40%): $77 per share, suggesting only 9% upside.

To buy with a margin of safety:

• At 10%: ~$53.

• At 20%: ~$47.

Wall Street analysts project a fair value of $50, implying a 30% downside over the next year.

Strengths and Risks

Reasons to Consider Buying:

Palantir is a leader in data analytics and has secured large government contracts, providing stable revenue streams.

Positioned for growth in the AI boom with platforms like Foundry and AIP.

Expected to achieve consistent profitability moving forward, a major milestone for long-term investors.

Reasons for Caution:

The stock’s valuation is exceptionally high, even after recent declines. Growth prospects are heavily priced in, leaving minimal room for execution missteps. Questions remain about the company's ability to sustain and scale profitability over time.

Conclusion

Palantir offers a compelling story for investors bullish on AI and big data. However, the stock's elevated valuation and execution risks suggest caution is warranted. For long-term investors confident in its growth trajectory, a larger market dip might present a more attractive entry point.

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