Palantir Technologies (NYSE:PLTR) is down 38.9% year-to-date (YTD) as of April 26 when it was at $11.12. This implies that just to get back to $18.21 at the end of last year, PLTR stock has to rise 63.8% from here. That is not likely to happen, at least in the short term. In short, investors in this large enterprise software company are disillusioned.
This is despite the fact that analysts and even Palantir forecast that its first-quarter sales will rise by over one-third to $443.4 million. However, when Palantir released its Q4 results on Feb. 17, it forecast that its operating margin would fall to 23%, down from 29% in the prior quarter. That could be one reason why the stock has been drifting down lately.
However, analysts are still projecting revenue will hit $2 billion this year. In addition, Palantir forecasts that its average adj. operating margin for the year will rise to 27%. That may take some convincing for the market, especially if the company reports 23% adj. operating margins for Q1 on May 9.
Palantir still has a market capitalization of $22.57 billion. Even if the company makes $2.01 billion in revenue this year, its price-to-sales (P/S) multiple is very high at over 11 times sales. Even using the $2.6 billion revenue forecast for 2023, PLTR stock still trades on a forward P/S metric of 8.68 times sales. That is not very cheap, by any measure.
For example, we can compare this multiple with other tech stocks of its size. Expedia (NASDAQ:EXPE), with its $29 billion market cap, trades at just 2.46 times the forecast $11.8 billion in sales this year.
On the other hand, Ansys (NASDAQ:ANSS), an engineering software company with a $23.55 billion market cap, trades at 11.3 times its $2.08 billion forecast sales. However, CDW Corp (NASDAQ:CDW), a hardware/software tech company has a $22 billion market cap. It trades for less than one times its forecast $24 billion in forecast sales. Unity Software (NYSE:U), at $21.97 billion, trades for 14 times $1.5 billion in forecast sales.
These software stocks have multiples ranging from 1x to 14x sales. The average of these similar market cap software companies multiples is 7.1 x sales. It’s possible that PLTR stock really should trade at 11x 2022 forecast sales and 8.7x 2023 sales projections.
But on the other hand, if Palantir’s sales growth and adj. operating margins don’t hit its declared targets, PLTR stock could run into weakness. It could fall to the average of seven times sales, or 36.3% lower. That would put its price at $7 per share.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.