In recent months, rumors have circulated that artificial intelligence (AI) powerhouse Palantir (PLTR +4.21%) might be preparing to announce a stock split. Why should investors care? While stock splits technically do not directly affect returns in and of themselves, time and again, split announcements are followed by rallies.
NASDAQ: PLTR
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But do splits actually cause rallies? It's unclear. It may just be that splits are generally announced by companies when they already have strong momentum behind their stocks, and any link between the two things is correlative. It's also possible that the reduced share prices attract new investors who would not otherwise have invested in those stock-splitting companies.
The rumors weren't true, but that doesn't mean a split isn't coming
The most recent buzz about a Palantir stock split can be traced back to an RBC Capital analyst who said that retail traders were "focused on the potential for a stock split," hoping it would be announced along with the company's Q3 earnings in November. While no split was announced at that time, after the stock's meteoric 585% rise over the last five years -- and given the stock's popularity with the type of retail traders who tend to respond particularly favorably to splits -- I wouldn't be surprised if one occurs in the next year.
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Palantir shares are pricey
Whether a split happens or not is beside the point, really. While rallies often follow splits, they can be short-lived if the underlying business fails to justify the higher price with its performance. While I think Palantir will continue to rapidly grow its top and bottom lines for some time, I still wouldn't buy the stock. Not at this price. As of Thursday, it was trading at a price-to-earnings ratio of about 435, and even its 1-year forward P/E ratio was 184. Those are extremely lofty premiums. As such, the company is priced for perfection, and any wavering would likely lead to a major correction.
