Billionaire Ken Griffin is the founder and CEO of Citadel Advisors, the highest-ranked hedge fund as measured by net gains since inception, according to LCH Investments. The means Griffin is arguably the most successful hedge fund manager in history, which makes him a good case study for individual investors.
Griffin sold 9.2 million shares of Nvidia in the second quarter, reducing his position by 72%. Meanwhile, he added 5.2 million shares of Palantir Technologies(NYSE: PLTR), increasing his stake by 1,140%. Importantly, Citadel still had twice as much capital invested in Nvidia as Palantir as of June 30, so it would be wrong to assume Griffin lacks confidence in the chipmaker.
That said, nothing changes the fact that he sold Nvidia stock and purchased a substantial amount of Palantir stock during the second quarter. And Griffin is not the only Palantir bull. The stock has surged 140% year to date. Here's what investors should know.
Palantir is a recognized leader in artificial intelligence platforms
Data analytics company Palantir has reported increasingly impressive financial results over the past year. In the second quarter, its clientele increased 41% and the average customer spent 14% more. In turn, revenue rose 27% to $678 million, marking the fourth straight acceleration, and non-GAAP earnings increased 80% to $0.09 per diluted share.
Additionally, remaining performance obligation increased 41% to $1.4 billion, hinting that sales growth may accelerate further in future quarters. Management also raised its full-year guidance, such that revenue is now forecasted to increase 23% in 2024. Previously, Palantir anticipated 21% revenue growth, but strong execution surrounding its Artificial Intelligence Platform (AIP) has altered its top-line trajectory.
To elaborate, Palantir sells data analytics software. Its primary platforms, Foundry and Gotham, let businesses collect data, develop machine learning models, and incorporate those assets into applications that drive better decision-making. AIP adds support for large language models to Foundry and Gotham, which enables clients to "bring the power of generative AI into their most critical operations," according to Palantir Chief Architect Akshay Krishnaswamy.
The product has garnered praise from industry observers. Earlier this year, Dan Ives at Wedbush Securities called AIP the "launching pad of AI use cases" for many U.S. enterprises. Additionally, Forrester Research recently recognized Palantir as a leader in machine learning and artificial intelligence platforms. "Palantir is quietly becoming one of the largest players in this market," analysts wrote in the report.
Palantir has reoriented its go-to-market strategy around AIP bootcamps, workshops where prospective clients learn to use the platform in days. Over 1,025 organizations attended bootcamps in the past year, and those events have been a huge success. "The persistent and unbridled demand for our software, for an effective enterprise platform that makes artificial intelligence capabilities useful to large institutions, shows no sign of relenting," CEO Alex Karp wrote in his recent shareholder letter.
Palantir's stock trades at an exorbitant valuation
The problem with Palantir is its stratospheric share price. Wall Street expects its adjusted earnings to increase 22% over the next year. That consensus figure makes the current valuation of 130 times adjusted earnings look very expensive. Those figures give a PEG ratio close to 6. For context, PEG ratios below 1 are generally considered cheap, while ratios between 1 and 2 are seen as reasonable.
In that sense, Palantir's stock would still be expensive even if the company's earnings grow twice as fast as analysts anticipate over the next year. Not surprisingly, Wall Street is quite bearish. Palantir's median price target of $27 per share implies 35% downside from its current share price of $41.45. No other company in the S&P 500 has a greater discrepancy between its current price and median price target, according to FactSet Research.
Given the current valuation, I wouldn't be surprised if Ken Griffin sold down his Palantir position in the third quarter. Either way, I think investors should avoid this stock until the price drops substantially. Additionally, shareholders with big positions in Palantir should consider selling a few shares right now.
As a final thought, Wall Street expects Nvidia's adjusted earnings to increase 53% over the next year. That makes the current valuation of 60 times adjusted earnings look reasonable. Those figures give a palatable PEG ratio of 1.1. To that end, I wouldn't be surprised if Ken Griffin added to his Nvidia position in the third quarter.
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Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends FactSet Research Systems, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
