The price-to-earnings-growth (PEG) ratio is often considered a better indicator than the price-to-earnings (P/E) ratio for a company like Palantir Technologies (PLTR) because it provides a more complete picture of valuation by factoring in expected earnings growth, which is particularly relevant for growth-oriented companies.
The P/E ratio measures a company's current stock price relative to its earnings per share (EPS). While this is a useful snapshot, it doesn’t account for how fast a company’s earnings are expected to grow in the future. For a high-growth company like Palantir, which operates in the rapidly expanding fields of artificial intelligence and data analytics, the P/E ratio alone can appear extremely high—potentially signaling overvaluation—because investors are willing to pay a premium for anticipated future earnings rather than current profitability.
The PEG ratio improves on this by dividing the P/E ratio by the expected annual earnings growth rate. This adjustment helps investors assess whether the stock’s price is justified by its growth prospects. A lower PEG ratio (typically below 1) suggests that the stock may be undervalued relative to its growth, while a higher PEG ratio (above 2) might indicate overvaluation. For Palantir, which has seen significant revenue growth—28.79% year-over-year in 2024—and a projected EPS growth of around 27% for 2026, the PEG ratio contextualizes its lofty P/E (currently over 500 based on trailing earnings) by showing how that price aligns with future earnings potential.
For example, a high P/E might scare off investors if viewed in isolation, but if Palantir’s earnings are expected to grow rapidly due to expanding government contracts, commercial adoption of its AI platforms, or new initiatives like AIP, the PEG ratio could reveal that the stock isn’t as overpriced as it seems. This is especially critical for growth stocks, where current earnings may be modest or even negative (as Palantir’s were historically), but the market is betting on significant future gains. The P/E ratio misses this forward-looking nuance, while the PEG captures it.
However, the PEG ratio isn’t perfect—it relies on growth forecasts, which can be uncertain or overly optimistic. Palantir’s PEG, based on recent data,0.84, when any number less than 1 is the benchmark for an undervalued stock.
Conclusion for me is that pltr is still a buy today. Hope it goes to moon this year. Which Metric would you use to evaluate Pltr?
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