This company’s artificial intelligence (AI) software technology has helped the stock become the talk of the market.
Memories can become short when markets get turbulent. Palantir Technologies (PLTR 7.17%) was at an all-time high less than a month ago, but has quickly tumbled approximately 30% since its peak as the broader Nasdaq Composite has entered a correction. But if you zoom out, the stock is up about 1,000% over the past two years, even with the recent decline.
That’s seriously impressive. The S&P 500 (SNPINDEX: ^GSPC) historically returns an average of roughly 10% annually — some years much more; some years much less, even a loss. Wall Street’s excitement for artificial intelligence (AI) and Palantir’s accelerating growth, emerging leadership in AI software, and long-term potential have fueled the stock’s ascension.
When stock prices rocket higher like this, you sometimes get stock splits, which increase the number of shares while decreasing the price proportionally. Individual investors generally love stock splits because they lower the share price, making it easier to buy shares for those without access to fractional shares. Remember, stock splits do this by increasing the share count, so the stock isn’t fundamentally cheaper. The share price is lower because each share represents less equity in the company.
So, should investors expect Palantir to split its stock anytime soon? Here are two key things to consider.
1. Palantir’s stock price isn’t exorbitantly high
Arguably, the primary benefit of stock splits is that they make stocks easier to buy or sell and remove an emotional barrier for folks looking only at share price rather than value. For individual investors, it can be easier to accumulate shares when you can buy them at lower prices. (Don’t forget some brokerages offer fractional shares for those who don’t have enough investing cash for a full share.) For company employees sitting on stock-based compensation, having more shares at a lower price makes it easier to control how much they cash out at any given time.
While Palantir stock has done tremendously well over the past couple of years, it closed Tuesday at $78, so there’s no real sticker shock there.
2. Share price momentum has turned lower
There’s an additional argument that Palantir’s recent price momentum is working against a split happening. Long-term investors shouldn’t put too much emphasis on near-term share prices, but price momentum does impact sentiment toward a company. A stock split sends a message to investors.
It might be seen as a positive when a company’s stock is red hot. It says: Hey, things are going great, and we want to make shares more affordable, so more investors can participate in our success. On the other hand, a split while the stock is struggling could send a negative message. People don’t like seeing low share prices, so splitting when the stock is dropping isn’t as likely.
Palantir is currently on a slide; shares have fallen over 30% over the past several weeks, so I think that argues against an impending stock split.
Nobody can predict short-term share prices, so Palantir’s slide could end soon, but it could also continue, especially if investors balk more at its high valuation.
Check out its price-to-sales ratio in the chart below.
PLTR PS Ratio data by YCharts
Even the great Nvidia, arguably the most successful AI stock over these past two years, peaked at a price-to-sales ratio of 45, and that makes Palantir look even more expensive. Palantir’s share price could drop 50% if its valuation reverts closer to other AI stocks.
Should investors expect a stock split?
Remember, stock splits don’t fundamentally change anything about a stock other than its share price, so investors should never buy or sell a stock based on the prospects of a stock split.
That said, stock splits are most likely when a stock has momentum, growth expectations, and a share price that has become seemingly burdensome to investors. Palantir doesn’t check all those boxes today.
The stock has been a huge winner, and Palantir’s business is poised to grow for the foreseeable future. Yet the stock’s aggressive valuation already reflected much of that. Now that it’s begun unwinding, it’s hard to see management deciding to split the stock.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
