Palantir and AMD Just Reported Earnings. History Says This Will Happen to Both Stocks Next.
Key PointsNeither AMD nor Palantir have any obvious upcoming catalysts that could drive rapid margin expansions.
Chipmaker AMD and data analytics giant Palantir both released their third-quarter earnings reports recently. After the announcements, Palantir's stock dipped slightly while AMD's increased in value. While both companies experienced rapid business growth, investors should pay attention to another factor: the stocks' valuations. These companies have high valuation levels, and history suggests this might not be favorable for their stocks.
Investing in successful businesses is just one aspect of investing; their stocks must also be reasonably priced. Determining a reasonable price for a stock can be complex, taking into account factors such as industry, performance, and overall sector sentiment. However, most stocks typically fall within certain valuation ranges. Both AMD and Palantir are established businesses, and their profit margins are not expected to increase significantly in the coming years.
Therefore, the price-to-earnings (P/E) ratio is a useful tool to assess their valuations. Nevertheless, given their rapid growth, the trailing P/E ratio may not accurately reflect their future performance. Instead, valuing these companies based on their projected earnings for the next year is a more appropriate approach. While AMD appears relatively more affordable at 30 times next year's earnings, Palantir's forward P/E ratio of 71 is notably higher, indicating it is significantly more expensive.
Nvidia (NVDA), AMD's main competitor, trades at just 13 times forward earnings and is outperforming AMD. While temporary overvaluation can occur, stocks generally revert to their normal valuation levels over the long term. This could pose a challenge for both Palantir and AMD. Although it's not certain, their high valuations may signal that a period of underperformance for their stocks is approaching as the market normalizes their valuations.
Therefore, investors should avoid these two companies, as there are better alternatives available. For better investment decisions, consider The Motley Fool's premium services, which offer stock recommendations and portfolio guidance.
Written by urgent.news from Motley Fool's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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