THE ECONOMIST: Is Palantir the next big short? $430b valuation draws Cisco comparisons and investor caution

For a few days in March 2000, as the dotcom bubble neared bursting point, Cisco was the world’s most valuable company. Now the seller of networking gear is a cautionary tale, even if it is also an enduring success, with real earnings per share of four-and-a-half times what they were back then. Investors became so exuberant about the firm’s prospects 25 years ago that they valued it at more than 200 times its annual profit, or around $US1 trillion in today’s money ($1.53t) Starting from a valuation that stratospheric, Cisco’s solid-but-unspectacular growth was a bitter disappointment. Its market value is now $US280 billion.

No one can accuse Palantir, a data-analysis outfit and the most searingly hot stock of 2025, of unspectacular growth. It reported revenue of $US1b for the second quarter of this year, some 48 per cent higher than for the second quarter of 2024 and quadruple the figure for the same period in 2020. Silicon Valley types seek out companies satisfying the “rule of 40”, meaning that the sum of their operating margin and year-on-year sales growth, both expressed in percentage points, is higher than 40.

Palantir’s score on that measure is 94: higher than any other enterprise-software firm with equivalent or greater sales. Among the world’s 25 biggest companies by market value — of which Palantir is one — only Nvidia, with its near-monopoly on advanced chipmaking, scores higher.

Any investor would want a piece of that. The trouble is that Palantir’s market value has already soared to $US430b, more than 600 times its past year’s earnings and nearly triple the equivalent multiple for Cisco (or, indeed, Nvidia) at its peak. Software firms often prefer to express their valuation in terms of underlying sales, which puts Palantir’s multiple at around 120. For comparison, in 2005, the year before the Oxford English Dictionary added the verb “Google”, Google’s price-to-sales ratio peaked at 22.

You need not look far to explain why Adam Parker of Trivariate Research, an investment firm, has published a note entitled “Could Palantir be the best short idea?”. Writing in late May, he examined the ratio of enterprise value (which adjusts market value to account for debt and cash on the balance-sheet) to forecast sales for the coming year.

On this measure Palantir then scored 73 and now scores 104. Mr Parker looked for other listed companies that had hit a multiple of 70 since 2000. Excluding financial firms and those with annual revenue of less than $US50m, he found 14, the largest of which has a market value around a quarter of Palantir’s. That was Strategy (formerly MicroStrategy), a firm that sells some software but pitches itself to investors as a “bitcoin treasury company”, with a value derived from its cryptocurrency holdings rather than its sales.

Mr Parker also looked at the shareholder returns such companies have generated. He first lowered the bar to an enterprise-value-to-sales ratio of 30, since so few firms have ever hit Palantir’s heights. He then measured their subsequent returns after first hitting this level, relative to the S&P 500 index. A year after its multiple first hit 30, the median firm had underperformed the index by 22 per cent and seen its multiple contract to 18.

What, then, would it take to make Palantir’s shares worth buying? The firm helps everyone from spooks to fast-food chains analyse their data better and thereby improve their operations. Its blistering recent growth comes, in large part, from enthusiasm over adopting artificial intelligence for such purposes.

Palantir’s competitive advantage derives not just from its software and clever engineers, but from a high-level security clearance allowing it to process classified information from America’s defence and intelligence agencies. This gives it a “moat” with which to fend off competitors.

It will certainly need one. To reduce its price-to-sales valuation to “only” what Google’s was at its peak in 2005, while maintaining its current share price, Palantir needs to multiply its revenue by 5.6 — substantially more than the barnstorming progress it has made over the past five years. Doing this over the next five would require an annual growth rate above 40 per cent.

Sustained revenue growth of that magnitude or more is possible, even at Palantir’s scale: Google (now called Alphabet), Meta and Nvidia have all managed it. Yet none was priced to do so in advance — and they are, after all, among the most successful firms in history. The remarkable thing about Palantir is it needs to grow at this rate for shareholders to have a good chance of breaking even. There is no allowance for an upstart competitor, a scandal that makes clients wary or even a mere slowdown. If any of those strike, Cisco will need to make way for a new cautionary tale.