Is Palantir a Buy?

One of the hottest stocks this year has been Palantir (NYSE: PLTR). The company's strong results and inclusion into the S&P 500 have helped its stock soar more than 250% this year, as of this writing.

While the stock has been a great performer this year, the question on many investors' minds is whether the stock is still a buy after its big gains this year. Let's take a closer look at both the buy and sell cases regarding Palantir stock to help you decide.

Accelerating growth is the anchor to the buy case for Palantir

Palantir has established itself as one of the leading data gathering and analytics companies in the world through its work with the U.S. government, with such mission-critical tasks as fighting terrorism and tracking COVID-19 cases. However, the company's Artificial Intelligence Platform (AIP) and its move into the commercial sector are the biggest reasons to be bullish on the stock.

The company has seen its growth in the U.S. commercial sector explode in recent quarters, as it continues to add more and more commercial customers who are attracted to its AI platform and the various use cases it can be used for across industries. Last quarter, Palantir's U.S. commercial revenue surged 54% to $179 million, with it saying that AIP was seeing "unrelenting AI demand" among these customers. Its U.S. commercial customer count, meanwhile, grew 77% year over year, while its total contract value (TCV) jumped 37% to nearly $300 million.

The company has also been seeing accelerating growth with its largest customer, the U.S. government, which has begun embracing its AI offerings. U.S. government revenue climbed 40% last quarter to $320 million. The company said it is starting to see every aspect of government, including the White House, Congress, Defense, and Intel agencies, begin to embrace the application of large language models (LLMs).

The biggest opportunity for Palantir going forward, however, is moving customers from AI prototype work into production. Right now, the company is landing a lot of new customers, but the bigger opportunity will come when it starts expanding within these customers. The company already has a strong net dollar retention rate, which came in a 118% last quarter. This measures how much revenue came from existing customers that have been with the company for more than a year, minus any customer churn.

However, Palantir's net dollar retention does not include growth from customers added within the past 12 months, and this is where the big growth opportunity lies. Palantir has added a lot of new AIP customers over the past year for early AI prototype work, and expanding within these newer customers will really give it an opportunity to continue to accelerate its revenue growth moving forward. And accelerating revenue growth can lead to a higher stock price.

Image source: Getty Images.

Valuation and executive selling anchors the sell case for Palantir

While Palantir has proven itself to be a great company, whether its stock is a buy is a totally different question. While great companies typically don't trade at bargain-basement prices, valuation does still matter.

And valuation is the biggest knock on Palantir's stock. The stock now trades at a forward price-to-sales (P/S) ratio of about 40 times next year's analyst estimates. Taking out its net cash and using an enterprise value to sales multiple (EV/S), it still trades at 39 times. At the peak of software-as-a-service (SaaS) valuations, SaaS stocks traded at a 19.4 EV/S multiple while growing revenue in the low 30% range, which is just below the 30% growth that Palantir recorded last quarter.

PLTR PS Ratio (Forward 1y) data by YCharts

Meanwhile, Palantir executives and other insiders also appear to recognize the valuation heights to which the stock has climbed, with a number of them unloading shares in recent months, including CEO Alex Karp.

Karp has been a regular seller of Palantir stock in recent years, but he has greatly picked up his selling since September. Over the past few months, he's exercised options and sold stock on four separate occasions, selling more than 33 million shares for gross proceeds of more than $1.6 billion. Meanwhile, chairman Peter Thiel sold over $1 billion in stock in September and early October, while numerous other insiders have been selling shares as well.

The verdict

In the case of Palantir, I'd follow what the company executives are doing. It's a great company, but its valuation is now twice what peak SaaS valuations were just a few years ago, with a similar growth rate.

As such, I would not be a new buyer of the stock, and I think investors should at the very least consider taking some profits in the stock after a very strong run.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.