Stock-Split Watch: Is Palantir Next?

Key Points

• Palantir is one of the hottest companies in the red-hot artificial intelligence sector.

• The stock has been on an unbelievable run.

• Companies may use stock splits after a stock has experienced strong appreciation.

• 10 stocks we like better than Palantir Technologies ›

The artificial intelligence (AI) data analytics company Palantir (NASDAQ: PLTR) has been the stock to own in recent years. As of October 1, it's up nearly 140% this year and more than 1,850% over the past five years, making it one of the largest beneficiaries of the artificial intelligence boom.

Companies can use stock splits to artificially manipulate their share prices and outstanding share counts without changing a company's market cap, but they often do so for specific reasons and not at random. After Palantir's big move in recent years, is a stock split on the horizon?

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Why do companies split their stocks?

Management teams may want to consider changing a company's outstanding share count or share price for several reasons. If a stock has performed well and gone on a big run, management may want to lower its share price to make the company's stock feel more attainable for all investors, from the "smart money" on Wall Street to the average retail investor. Traditional stock splits can also increase the share count, which can boost liquidity.

Image source: Getty Images.

For example, let's say an investor purchased 100 shares of a company trading for $150 per share for a total equity investment of $15,000. If a company were to conduct a 3-for-1 stock split, an investor would exchange every share of the stock they owned for three new shares, giving that investor 300 shares. Remember, the market cap of the company -- and therefore an investor's equity position -- will remain the same, so the new share price of the stock would be $50 ($15,000/300).

A reverse stock split does the opposite, increasing the share price and lowering the share count of a company. Companies can conduct reverse stock splits if they are at risk of breaching compliance rules with a major stock exchange, such as the New York Stock Exchange or the Nasdaq.

If companies on either exchange trade for less than $1 per share for at least 30 consecutive trading days, they can eventually be delisted. If a company thinks it can turn things around and wants to remain on a major exchange, conducting a reverse stock split can buy it some time.

Is Palantir next?

Despite its dazzling rise to a roughly $427 billion market cap, Palantir has never conducted a stock split since going public in 2020. Trading close to $180 per share, Palantir stock isn't close to breaching any Nasdaq compliance rules. It's also been one of the hottest stocks in a sizzling sector, so liquidity isn't an issue.

Given its rise, Palantir, in theory, could conduct a stock split if it wanted to lower its share price, but I don't see a compelling reason to do this. Palantir's stock price doesn't necessarily feel out of reach, and I'm not sure a split would accomplish much in terms of the problems that investors have with the company's valuation. Adter all, stock splits don't change the stock's valuation ratios at all -- though the market reaction to a split often drives the stock even higher for a short while.

The market clearly loves Palantir, but has now pushed the valuation to a level that many analysts believe is unsustainable. While the AI -based data analytics expert has many use cases and is growing fast, it also now trades at 279 times forward earnings, which implies even more growth to come. AI stocks have captivated the market to the point where bearish investors believe the market may be in a bubble set to soon rival the Dot-Com bubble in 2000, which eventually popped and left a trail of failed tech companies.

The jury remains out on whether we're in for another bubble like that, but a stock split isn't going to impact Palantir's future one way or the other. The company could do one, but certainly doesn't need to.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends Intercontinental Exchange and Nasdaq. The Motley Fool has a disclosure policy.