For its first few years as a public company, Palantir Technologies(NASDAQ: PLTR) struggled mightily to capture meaningful market share in the enterprise software space. The company's sluggish growth and heavy reliance on lumpy federal contracts fueled a perception that Palantir was really more of a government consulting operation and less so a legitimate player in the software arena.
However, on April 7, 2023, Palantir CEO Alex Karp penned an investor letter that forever changed the narrative surrounding the company.
In this note, Karp revealed to the world that Palantir would soon be launching its fourth major suite: the Artificial Intelligence Platform (AIP). Since then, Palantir stock has gained 733% (as of Jan. 10).
It's not a coincidence that Palantir's skyrocketing share price has come at a time when all things AI are dominating the investment world. With that said, Palantir is not merely benefiting just from the positive narrative surrounding AI. The company has proven that it can compete with the tech sector's largest players, underscoring how game-changing AIP has been for the business.
Considering the sharp rise in its share price in less than two years, Palantir could make an interesting candidate for a stock split. Below, I'll explore reasons why Palantir may or may not split its stock soon.
Why Palantir might consider a stock split
In recent years, megacap technology stocks, including Tesla, Nvidia, Apple, Amazon, Alphabet, and Broadcom, have all completed stock splits. As I illustrated in a recent article, each of these stocks experienced outsized and prolonged run-ups in their respective share prices prior to completing a split.
Palantir is no different. In 2024, Palantir stock gained 340% and was the top performer in the S&P 500.
As the chart above shows, Palantir stock really began to kick into a new gear during the last few months of 2024. As such, the company's valuation has become stretched and its climbing share price may make it out of reach for smaller retail investors.
It's important to note that stock splits do not actually change the underlying valuation of a company. However, upon completing a split, the new split-adjusted price is often psychologically perceived as less expensive -- and so a larger body of investors tend to scoop up shares given the appearance of a lower price, pushing up demand, and in turn, the price of these shares.
Furthermore, since stock splits increase the number of outstanding shares for a company, more shares become available to trade on the market.
In short, by making an investment more accessible to a broader base of investors, Palantir's trading liquidity should improve following a split.
Image source: Getty Images.
Why Palantir probably won't consider a stock split anytime soon
Back in November, Palantir changed its trading exchange from the New York Stock Exchange (NYSE) to the Nasdaq (NASDAQINDEX: ^IXIC).
Most likely, that move was rooted in how the company was being perceived by investors. As I alluded to above, some analysts on Wall Street have remained skeptical of Palantir's future success. However, with Nasdaq being a more a tech-focused index, listing its shares on Nasdaq is a way for Palantir to become more closely associated with high-growth names in the technology sector.
Moreover, within a short span of time, Palantir was added to the Nasdaq-100 index -- which definitely helped the company land on the radars of more investors, specifically institutional investors. And now that Palantir has proven that it can generate consistent revenue and profit acceleration, it should be no surprise that it's one of the high-growth opportunities in the tech sector. But this means management won't be necessarily inclined to undertake a stock split primarily to increase trading liquidity.
Finally, stock splits can be time consuming and expensive affairs from the leadership's perspective. Stock splits need to be approved by a company's board of directors, and generally speaking, a business will spend countless hours with investment banking and accounting firms running sophisticated modeling scenarios to figure out how a split might impact the business in different ways.
Despite its success since the dawn of AIP in April 2023, Palantir is still very much in growth mode. To me, management should be more focused on scaling the business and acquiring market share rather than spending time looking at theoretical financial analyses following a split.
In other words, I see the prospect of a stock split as an intriguing concept, but one that is ultimately more of a distraction and pet project for Palantir.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Nvidia, Palantir Technologies, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
