Stock-Split Watch: Is Palantir Next?

Artificial intelligence (AI) stocks have soared in recent years, and though that's fantastic, when a stock reaches a particularly high level, it may have difficulty climbing even higher. That's why companies such as Nvidia and Broadcom last year each launched a stock split, a move to bring the price of their shares down to Earth.

Investors like stock splits for a couple of reasons: They make a stock more easily accessible to a broader range of investors, and they also could be viewed as a sign of confidence from the company. When looking for the next potential stock split player, investors generally consider companies that have seen their shares skyrocket. And with this, one particular player comes to mind: Palantir Technologies (NASDAQ: PLTR).

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The AI software company last year soared 340% and in the first half of this year climbed more than 80%. Could this highflier be next to split its stock? Let's find out.

Image source: Getty Images.

More shares for current holders

Before delving into the Palantir situation, though, a quick note on how stock splits work. These operations involve offering current holders additional shares of the particular stock, and this is done according to the ratio of the split. So in a 10-for-1 stock split, an investor who originally held one share would hold 10 shares post-split -- and that means a stock that traded for $1,000 before the split would see its price come down to $100.

But, importantly, the value of that investor's entire holding -- and the market value of the company -- won't change. And neither will valuation, that metric measuring whether a stock is expensive or cheap. So a stock split is purely mechanical and doesn't change anything fundamental about a company or its stock.

As a result, a stock won't jump or plummet just because a company has announced a stock split -- these operations don't act as a reason to buy or sell. But, as mentioned, they can be positive over time, as they open the investing opportunity up to more potential investors. They also show that management believes the stock has what it takes to rise again from its new lower price.

Palantir's stock split history

Now let's talk about Palantir. The company's past doesn't offer us clues about its view on stock splits, since it's never executed such an operation. This isn't shocking, since the company, though it's 20 years old, just went public five years ago. And the stock actually stumbled through its first couple of years on the market. But it started gathering momentum in 2023, and then, as I said earlier, surged last year, even delivering the best performance in the S&P 500, an index it had recently joined.

This is all thanks to soaring demand for Palantir's AI-driven software, a platform that helps customers aggregate their data and use it to improve efficiency and make game-changing decisions. In the past, Palantir generated most of its growth through contracts with the U.S. government, but in recent times, both government and commercial customers are delivering double-digit revenue increases.

Why the change? Palantir had originally built high-performance data aggregation and analysis systems, but the company two years ago launched a new addition to its portfolio: Its Artificial Intelligence Platform (AIP), an AI-driven system that helps customers, as seen in Palantir's AIP boot camps, go from zero to a use case in a matter of hours. This has appealed to both government and commercial customers, as they seek to benefit from AI as quickly as possible.

Palantir's valuation problem

As a result, Palantir has seen earnings take off and its number of commercial customers soar, from just 14 a few years ago to hundreds today. And this success has fueled extraordinary gains in the share price, pushing the stock to trade for 235 times forward earnings estimates, a level seen as extremely expensive.

Now let's get back to our question: Is Palantir ripe for a stock split? Not necessarily, and here's why. A split won't change Palantir's biggest problem: its valuation. Though it would lower the stock price, it technically wouldn't make the stock cheaper by common valuation metrics. Earnings per share is adjusted to correspond with the new number of shares post-split, and this leaves the valuation figure unchanged.

Meanwhile, Palantir shares, trading at just under $140, haven't reached excessively high price points in relation to its peers. Many other tech stocks trade for several hundreds of dollars per share, so it isn't shocking to see Palantir at its current level.

Of course, this could change if Palantir rises significantly in the months and quarters to come. But for now, the top AI stock probably won't be next on the stock split list.

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Adria Cimino 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.