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Palantir Technologies is among the top ten most-bought shares on Hargreaves Lansdown’s investment platform. The $93 billion software company is also one of the most expensive on the market, trading at more than 100 times its forward earnings, more than twice the level of the likes of Microsoft and Amazon. So why are British retail investors ploughing their money into the business?
The company was co-founded in 2003 by a group of Silicon Valley entrepreneurs, including Peter Thiel, the technology billionaire. Named after the magical “seeing stones” in The Lord of the Rings, Palantir started out building software for the intelligence community in the United States to help with counter-terrorism investigations and operations.
The technology was developed initially for government use, but Palantir has expanded into commercial areas, too, so that today its $2.2 billion in annual revenue is split relatively evenly between the private and public sectors. It works with the UK government via contracts with the Ministry of Defence and the NHS.
Its two key products are the Gotham and Foundry platforms. Both are designed to be modern operating systems for a large, complex enterprise. Gotham, for example, has helped with data insights for defence agencies and disaster relief organisations.
The company, which went public in New York in October 2020, has won investors’ favour over the past year thanks to excitement around artificial intelligence. Its shares have more than doubled in value in the past 12 months, recently earning the company a spot in the premier S&P 500 index.
Palantir has developed AI software for some time, but the official launch of its artificial intelligence platform has bolstered growth expectations. The platform allows companies to integrate large-language models — the likes of which support tools such as ChatGPT — into their internal servers. This means that generative AI models can run on a company’s own data, giving its users the most up-to-date information at any point in time.
Palantir has said that demand for its artificial intelligence platform has been “unprecedented”, as shown by growth in its commercial business in the United States. In the quarter to the end of June, the company said that its American commercial sales were up by 55 per cent compared with the previous year to $159 million, with the customer count rising by 83 per cent year-on-year to 295. Overall revenue rose by 27 per cent to $678 millionand its gross profit was up by 28 per cent to $549 million.
The company’s recent growth has been impressive, but its steep valuation is a concern. The stock trades at an enterprise value that is 32 times sales. The last time it traded at such a level was in 2021, when revenues were growing by an annual rate of about 40 per cent. Wall Street forecasts suggest that this is set to slow considerably, even with the success of its artificial intelligence platform product. Sales are expected to rise by 24 per cent in the 2024 financial year, decelerating to 20 per cent in 2025, according to estimates compiled by FactSet.
In order for Palantir to meet its revenue targets for 2025, it will need to achieve a demanding 33 per cent three-year compound annual growth rate from 2022, according to an analysis by RBC Capital Markets, the broker. This looks a tall order and, with these sky-high expectations, any bump in the road could dent the share price.
Prospective investors should be mindful, too, that Palantir is no stranger to controversy. This year Alex Karp, the company’s chief executive, told CBC News that short-sellers “just love pulling down great American companies so they can pay for their coke”. That being said, it is partly because of Palantir’s distinctive management style that it has built up a dedicated following of retail investors. This, combined with its recent addition to the S&P 500, means it is unlikely that demand for the shares will fade any time soon. For now, though, the premium on the shares looks far too high to justify.
Advice Avoid
Why Growth forecasts are not strong enough to justify such a high premium
Advanced Medical Solutions is not the flashiest name in London’s junior stock market, but improved trading and talk of takeover interest suggest that it may be worth investors taking a look.
The £486 million, Cheshire-based maker of tissue-healing products develops and manufactures surgical brands such as LiquiBand and Resorba. Last week reports surfaced that the company had attracted some bid interest, although there have been no formal offers.
Even before the takeover speculation, shares in Advanced Medical Solutions had risen by roughly a tenth this year. While the company has struggled with falling sales in its wound care division, recent progress has been strong. Last week it said group revenues in the first half of its financial year were up by 10 per cent on a constant currency basis, led by demand in its surgical division. Overall, it made £14.8 million in adjusted pre-tax profits, on £68 million in sales in the first half.
There are still some issues in its wound treatment business, which is responsible for more than a quarter of total sales. Revenue here dropped by 17 per cent in the first half because of weak demand, as well as the loss of royalty revenues from an old patent deal with Organogenesis, another specialist in wounds. But the group has just finished a review of this business, which concluded that it should focus on higher-margin products.
Advanced Medical Solutions has leaned on mergers and acquisitions to support its growth recently, having bought Peters Surgical, a sutures specialist, in July and having completed a smaller deal for Syntacoll, another manufacturer, before that. Together these additions are expected to deliver £10 million in cost savings by 2027, which should help the profit margin to edge up over the next few years.
There has been some wariness around the Peters acquisition, but so far the numbers look good. Advanced Medical Solutions noted that Peters had increased its revenues by 6 per cent in the 12 months to the end of June. According to analysts at Panmure Liberum, the broker, this compares with Advanced Medical Solutions’ forecast for Peters for the 2024 financial year of revenue growth of 4 per cent, which suggests the company could be trading better than expected.
Advice Buy
Why Improving performance