Aswath Damodaran, Dean of Valuation, says that Palantir is one company he refrains from valuing as he has no idea what they do; here are some investment lessons

NYU Finance professor Aswath Damodaran, also known as the "Dean of Valuation," recently shared his views about Palantir Technologies in a podcast with NYU professor Scott Galloway. Even though Palantir’s stock rose 550% since last year and this year its stock price surged 49%, Damodaran is not sure about the company, as per a report.

When asked if he thinks Palantir's stock is overvalued, Damodaran did not hesitate to declare that it's the only company he won't value, reported The Motley Fool. He confessed that he has "no idea what they actually do" or at least not sufficient to create an intelligible impression, perhaps owing to the nature of their task being classified and proprietary, according to The Motley Fool.

While Damodaran's comment might seem humorous, it is an investment lesson that an investor must keep in mind before investing in a company, as per the report. Here is a closer look at what he meant.

Palantir's strong yet mysterious business

Palantir has been making big strides lately, the technology firm has been reaping revenues and profits, striking strategic deals with behemoths such as Amazon, Meta, Microsoft, and Oracle, as per reports.

Palantir’s AI software is used for everything from military operations and supply chain management to fighting fraud and optimizing healthcare. While other software companies may offer similar services, Palantir’s growing partnerships are giving it a strong edge.

Despite all this growth and partnership, however, Palantir's business model is still a mystery to many, including Damodaran. The opacity, attributed to the classified work that it undertakes, does not make it easy for the dean of valuation, or other investors to develop a solid understanding of exactly what the firm is doing in the background.

Should you buy Palantir stock?

According to The Motley Fool, it is important to consider the company's valuation. Palantir's 96 price-to-sales (P/S) is much greater than the competition in the enterprise software sector, and that number is increasing. This indicates that investors are catching on to the trend.

But Damodaran warns not to blindly jump on the bandwagon. The increase in Palantir's stock price may be more of a momentum phenomenon and less about fundamentals. This is like the "greater fool theory," in which investors purchase a stock hoping someone else will pay an even higher price for it down the road, without knowing anything about the business behind it all, according to The Motley Fool.

The key investment lesson

Damodaran's viewpoint is a good wake-up call to investors: if you don't really understand what a company is up to, it may not be such a great idea to invest in the company, as per The Motley Fool. Investing successfully means due diligence, and if the ins and outs of a company's business model are over your head, it may be better to seek opportunities elsewhere, according to the report.

FAQs:

Why did Aswath Damodaran refuse to value Palantir?
Damodaran explained that he doesn’t fully understand Palantir's business, especially given the company’s classified and proprietary work.

Does Palantir's stock price reflect its actual value?
According to The Motley Fool, it’s hard to say because the company’s business model is difficult to assess. The rise in stock price could be more about momentum than actual growth or value.