Palantir Technologies stands out as one of the most popular stocks among retail investors on Hargreaves Lansdown’s investment platform. The software company, valued at $93 billion, trades at a premium price, with a valuation exceeding 100 times its forward earnings, significantly higher than tech giants like Microsoft and Amazon. What is driving UK investors to commit their funds to Palantir?

Founded in 2003 by a group of Silicon Valley innovators, including billionaire Peter Thiel, Palantir is named after the magical “seeing stones” featured in The Lord of the Rings. Initially, the company focused on developing software solutions for the U.S. intelligence community, specifically to assist in counter-terrorism operations.

While its roots are in government contracts, Palantir has successfully diversified into commercial sectors, with annual revenues of $2.2 billion now evenly distributed between public and private clients. The company has secured partnerships with various branches of the UK government, including the Ministry of Defence and the NHS.

Palantir’s primary offerings include the Gotham and Foundry platforms, which serve as sophisticated operating systems for complex enterprises. The Gotham platform, for instance, has been instrumental in providing data analytics support to defense agencies and aiding disaster relief efforts.

Since going public in October 2020, Palantir has gained traction among investors, particularly in the wake of increasing interest in artificial intelligence. Over the past year, the company’s stock has more than doubled, earning it a place in the prestigious S&P 500 index.

Palantir has been developing AI capabilities for some time, and the recent launch of its AI platform has heightened growth expectations. This platform enables businesses to integrate large language models akin to those behind ChatGPT into their infrastructure, allowing generative AI models to operate on proprietary data for real-time insights.

The company reports an “unprecedented” demand for its AI platform, evidenced by a 55 percent increase in American commercial sales to $159 million in the quarter ending June, alongside an 83 percent increase in customer numbers, reaching 295. Overall, Palantir’s revenue grew by 27 percent to $678 million, with gross profit rising by 28 percent to $549 million.

Despite these impressive figures, concerns about its high valuation persist, with an enterprise value that is 32 times sales. The last time it reached such a level was in 2021 when it experienced a robust 40 percent annual revenue growth rate. Current Wall Street projections indicate a significant slowdown, with anticipated sales growth of just 24 percent in the 2024 financial year, tapering to 20 percent in 2025, based on FactSet estimates.

According to analysis by RBC Capital Markets, Palantir would require a challenging 33 percent compound annual growth rate from 2022 to meet its revenue goals for 2025. Given these lofty expectations, any setbacks could adversely affect the stock price.

Investors should also consider Palantir’s controversial reputation. Earlier this year, CEO Alex Karp expressed criticism of short-sellers, suggesting they undermine successful American companies. Nevertheless, the company has cultivated a loyal base of retail investors, particularly after joining the S&P 500, indicating lasting interest in its shares. However, the current market premium on its stock may be difficult to rationalize.

Overall Recommendation: Avoid

Rationale: Growth forecasts are insufficient to validate the high premium associated with its stock.

Advanced Medical Solutions: A Look at Potential Growth

Advanced Medical Solutions may not have the highest profile on London’s junior stock market, yet its recent trading improvements and potential takeover interest warrant investor attention.

This Cheshire-based company, valued at £486 million, specializes in tissue-healing products, manufacturing surgical brands like LiquiBand and Resorba. Recent reports indicate that it has garnered bid interest, though no formal proposals have emerged yet.

Prior to speculation about a takeover, shares of Advanced Medical Solutions had already appreciated by approximately ten percent this year. Despite facing challenges with declining sales in its wound care division, recent performance has shown promise. The company reported a 10 percent increase in group revenues during the first half of the financial year, significantly driven by growth in its surgical sector, resulting in £14.8 million in adjusted pre-tax profits from £68 million in sales.

Challenges remain in the wound treatment division, which constitutes over a quarter of total sales, where revenues declined by 17 percent due to weak demand and the loss of royalties from a past patent agreement. However, the company has completed a review of this division, aiming to prioritize higher-margin products moving forward.

To bolster growth, Advanced Medical Solutions has engaged in mergers and acquisitions, notably acquiring Peters Surgical in July, along with a smaller deal for Syntacoll. These transactions are expected to yield £10 million in cost savings by 2027, enhancing profit margins in subsequent years.

Despite initial skepticism surrounding the Peters acquisition, the financial performance appears promising, with Peters showing a revenue increase of 6 percent in the 12 months ending June. Analysts from Panmure Liberum suggest this reflects better-than-forecast trading results for the acquired company.

Overall Recommendation: Buy

Rationale: Strengthening performance indicates positive growth potential.