Is Palantir the Next Tesla?

Palantir‘s (PLTR -2.14%) impressive rise over the past few years has been nothing short of incredible. Still, there have also been questions surrounding Palantir’s ability to deliver on the high expectations baked into the stock price. There has been no shortage of analysts calling for Palantir’s fall (myself included) due to extreme valuation.

This reminds me of another stock whose valuation metrics do not make a lot of sense: Tesla (TSLA -1.64%). However, Tesla has continued to defy traditional valuation metrics and has stayed at an elevated stock price for some time.

Could Palantir fall into this same realm? Or is it so inflated that a crash is coming?

Tesla and Palantir’s rise look similar

Tesla stock’s primary rise started in 2020, increasing from about $24 per share all the way to around today’s $340 per share. It returned over 1,100% over that time frame, resulting in a rise that few stocks have ever matched.

Palantir’s rise has similarly been rapid and impressive. Its stock rose from around $16 to $185 at the time of this writing, resulting in about 1,000% gains. Both companies delivered impressive performance in a very short amount of time, despite not increasing their revenue by 10 times (or more) over that time frame.

As a result, most investors assume that they’ve grown too fast and are ripe for a pullback. But this analysis excludes a significant aspect of the investment thesis.

Palantir and Tesla have low institutional ownership

One of the reasons why Tesla’s stock did so well over that time frame is that individual investors owned it. Individual investors don’t have the same mindset as institutions. Various funds and other money managers are likely more devoted to traditional valuation metrics. If their discounted cash flow (DCF) models don’t work out, then they avoid the stock entirely.

However, companies like Tesla and Palantir break the mold of what traditional finance teaches, which can invalidate the assumptions that go into these models.

Individual investors are far more likely to take a long-term view and note that Tesla’s technology and vision could allow it to deliver massive growth over the long term. This illustrates a huge difference in approaches: Institutional investors utilize trailing metrics to predict the future, while individual investors look at the world and see where it could go.

This difference has allowed stocks like Tesla and Palantir to thrive, leading to massive market outperformance as individual investors are less concerned with traditional valuation measures.

Whether you think that’s a correct approach to these two stocks or not is irrelevant; it’s what’s going on.

Luckily, we have access to a metric that measures the percentage of shares outstanding that institutions own. For Tesla, about 49% of shares outstanding are institutionally owned. Compared to other tech giants, this is rather low. For comparison, Alphabet and Meta Platforms each have about 78% of shares outstanding owned by institutional investors.

That’s quite the difference and shows how much individuals, rather than large institutions, own Tesla. Palantir is in the same territory as Tesla, with about 53% of shares owned by institutions. Compared to the two closest companies in market cap to Palantir, Costco and ExxonMobil, these two have 69% and 67% of shares owned by institutional investors, respectively.

Because Palantir has a similarly small amount of shares owned by institutional investors as Tesla, the stock will likely continue to perform in a manner that some may consider irrational. The decision to invest in Palantir is up to you, but investors need to be aware that after Tesla’s massive run, the stock became incredibly volatile. Palantir could be approaching that point, but we’ll find out in the coming years.