Following a number of high-profile stock exits last year from companies such as Nvidia, broadcomAnd chipotleThe market has been relatively calm this year. This may change. Speculation is building this the powerhouse of artificial intelligence (AI)palantir(NASDAQ:PLTR) could soon announce a further split.
The mechanics of division are simple: As a company issues new shares to each shareholder, it reduces the price of each share proportionately, so that no one’s portfolio value ultimately changes. In a 10-for-1 forward split, you would own ten times your original shares, but each would be worth one-tenth the price.
In theory, stock splits shouldn’t really matter to an investor; They do this in practice. Divisions often lead to rallies. This may be purely relational (companies that initiate a forward split usually have a lot of momentum behind them), but it’s possible that the lower price point actually brings new investors on board and the split itself sparks growth.
No matter what, it’s worth paying attention. Last year, between announcing the split and actually executing the split, Chipotle, Nvidia, and Broadcom saw their stock prices rise by 66%, 121%, and 170%.
Will Palantir split its shares? Current rumors are being driven by an analyst from RBC Capital who said retail is “largely focused on the potential for a stock split,” but that’s been true for some time. There’s no way of knowing if, or even when, Palantir will announce the split. That said, it wouldn’t be a surprise if the company did so, given the stock’s rise of over 330% in the last year and its popularity among retail investors. I wouldn’t count on it though.
Also, divisions are not magic. These are a short-term catalyst at best, and investors should focus on the long term and the fundamentals of Palantir’s business. Shares of Nvidia and Broadcom have continued to rise over the past year and a half because the companies have been successful. At Chipotle, on the other hand, growth has stagnated and its shares have fallen nearly 30% since the split was announced.
On this front, Palantir looks strong. The company is currently operating in a downside manner that many of its peers cannot say, and continues to grow sales and earnings by double digits each quarter. Palantir is the poster child for the real-world utility and impact of AI.
The company’s success comes from its distinctive approach that supports personalized, personalized application of artificial intelligence. Palantir is working hard to customize AI systems for each company, sending its “forward-looking engineers” to work directly with the customers they serve.
Image source: Getty Images.
This makes AI applications more effective, efficient, and sticky for the end customer, which is critical to long-term success. This strategy, along with its cozy relationship with the federal government, has fueled massive growth on the top and bottom lines, as you can see in the chart below.
While investors wait for the perfect deal and miss opportunities, the truth is that a great company can be a bad investment. It’s hard to look at Palantir’s current valuation and see it as stretched, or even very stretched.
The stock is trading at a price-to-earnings ratio (P/E) above 620. This is a pretty extreme figure. Palantir will need to increase its earnings by 10x to reach reasonable levels. Even then, it would trade at nearly double the P/E. Alphabet. Whether the split is announced or not, I would avoid Palantir shares.
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Johnny Rice It has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Chipotle Mexican Grill, Nvidia and Palantir Technologies. The Motley Fool recommends Broadcom and recommends the following options: Short $45 calls on Chipotle Mexican Grill in December 2025. The Motley Fool has a feature disclosure policy.
