After a series of high-profile stock splits last year by companies like Nvidia, BroadcomAnd Chipotlethe market has been relatively calm this year. This could change. Speculation is building this artificial intelligence (AI) powerhouse Palantir(NASDAQ:PLTR) could soon herald a split ahead.
The mechanics of a split are simple: a company issues new shares to each shareholder while reducing the price of each share proportionally so that ultimately the value of no one’s portfolio changes. In the case of a 10-for-1 forward split, you end up with ten times the shares you started with, but each is worth a tenth of the price.
In theory, stock splits shouldn’t really matter to an investor; in practice, this is the case. Splits often trigger rallies. This could be purely associative – companies that initiate forward spin-offs usually already have some momentum behind them – but it’s possible that lower prices will actually attract new investors and that the split itself will spur growth.
Either way, it’s worth paying attention to. Last year, between announcing a split and actually executing it, Chipotle, Nvidia, and Broadcom saw their respective stock prices increase 66%, 121%, and 170%.
Will Palantir split its shares? The current rumors are fueled by an RBC Capital analyst who said retail trading is “largely focused on the possibility of a stock split,” although this has been true for some time. There’s really no way of knowing if Palantir will announce a split, let alone when. That being said, given the stock’s rise of over 330% over the past year and its popularity among retail investors, it wouldn’t be surprising to see the company do just that. But I wouldn’t bet on it.
Plus, breakups aren’t magical. They are, at best, a short-term catalyst, 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 delivered on their promises. Chipotle, on the other hand, has seen its growth stagnate and its stock has fallen nearly 30% since announcing its split.
On this front, Palantir looks strong. The company is operating in the black – something few of its peers can say at this point – and continues to grow sales and profits by double digits every quarter. Palantir is the epitome of the real-world utility and impact of AI.
The company’s success comes from its distinctive approach, which favors the tailor-made application of AI. Palantir works extensively to customize its AI systems for each company, sending its “forward deployed engineers” to work directly alongside the customers they serve.
Image source: Getty Images.
This makes their implementation of AI more effective, efficient and, critical to its long-term success, stickier for the end customer. This strategy, along with its close relationship with the federal government, has fueled massive growth in its bottom line and bottom line, as you can see in the chart below.
PLTR EPS diluted (TTM) data by YCharts.
While investors can get caught up in waiting for a perfect deal and miss opportunities, the reality is that a large company can be a bad investment. It’s hard to look at Palantir’s current valuation and view it as anything other than stretched – very, very stretched, in fact.
The stock is trading at a price-to-earnings (P/E) ratio above 620. That’s pretty extreme. Palantir would have to multiply its profits by 10 to get closer to reasonable levels. Even then, it would trade at a P/E nearly twice that of Alphabet. I would avoid Palantir stock whether a split is announced or not.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet, Chipotle Mexican Grill, Nvidia and Palantir Technologies. The Motley Fool recommends Broadcom and recommends the following options: Short December 2025 $45 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Is Palantir Wall Street’s Next Stock Split? was originally published by The Motley Fool
