Is Palantir Stock a Buy After a Stellar Quarter?

Palantir Technologies (NASDAQ: PLTR) has been in the news for all the right reasons. On Nov. 4, the company reported stellar third-quarter earnings results. Then, on Nov. 14, the company announced plans to shift its listing from the New York Stock Exchange to the tech-heavy Nasdaq Global Select Market exchange. That occurred on Nov. 26. Palantir has also highlighted expectations of joining the Nasdaq-100, which could bring more index-tracking investors.

Wall Street has rewarded Palantir's achievements, and the stock is up by 274% in 2024 as of this writing. This includes over 50% gains since the company's earnings results, despite a slight pullback associated with profit-taking.

Analysts, however, are becoming cautious of this high-flying artificial intelligence (AI) stock. Among the 24 analysts covering Palantir stock that The Wall Street Journal tracks, the median target price is $38, implying a downside of 41% at the time of this writing.

While it is undeniable that Palantir is a high-quality data mining stock with robust AI-powered tailwinds, the company's sky-high valuation -- a price-to-sales ratio near 60 -- requires investors to exercise caution.

Here's what astute investors should know about Palantir.

The growth potential of its AIP

Palantir's Artificial Intelligence Platform (AIP) has been focused on resolving real-time challenges for businesses. AIP differentiates itself from the competition by leveraging its "ontology" -- a digital twin of the organization demonstrating relationships between various digital data sets and models with their real-world counterparts -- and deploying open-source and closed-source AI models. AIP is already helping several businesses improve productivity and efficiency while reducing costs.

And AIP's unique go-to-market strategy has paid off. Instead of opting for pilot projects, which can take months for actual client conversions, Palantir focuses on demonstrating the real-world utility of AIP to companies using their data. It calls these sessions with potential clients boot camps. This, in turn, has enabled AIP to rapidly win customers (within less than two months) and convince customers to expand existing contracts.

Gaining customers

Once known mainly as a software company helping military and government agencies derive insights from huge data troves, Palantir is now increasingly making its presence felt in the commercial segment. The company's success in effectively implementing AI solutions is playing a pivotal role in driving the growth of its commercial business.

In the third quarter, the company's total commercial customer count grew by 39% year over year to 629 customers. U.S. commercial customer count grew at a much faster pace, by 77% year over year to 321.

Palantir expects commercial revenue to be more than $687 million in fiscal 2024, implying year-over-year growth of at least 50%.

Government business is good business

Palantir's government business is also seeing strong momentum, partly driven by the rapid adoption of AI solutions by government agencies. Revenue in the segment rose 33% year over year to $408 million in the third quarter. Here again, U.S. government business revenue grew faster, at 40% year over year to $320 million, mainly driven by increasing adoption of the company's services by the U.S. Department of Defense. The company has also partnered with defense contractors such as L3Harris, Anduril, and Shield AI to further strengthen its market position in the government segment.

With Palantir's U.S. government business recording the strongest growth in 15 quarters in the third quarter, reacceleration of government revenue can help the company build a well-diversified revenue base. The company's focus on national security and defense can also open new revenue streams.

Healthy financials

Palantir's business success is well reflected in its recent financial performance. Revenue was up by 30% and exceeded the higher end of company guidance by 450 basis points. The company also recorded a robust 58% adjusted operating margin and 60% free-cash-flow margin. Palantir also has a strong balance sheet with $4.6 billion in cash and negligible debt, giving it sufficient flexibility to invest in new projects.

Expensive valuation

Despite the many pros, Palantir's exorbitant valuation does not seem justified. The company is trading at a price-to-sales ratio near 60 -- higher than Nvidia's 31.

PLTR PS Ratio data by YCharts

Although Palantir is one of the best AI stories in the market, considering its sky-high valuation, coupled with significant execution risks, it seems prudent for astute investors to wait for a pullback before picking up a stake in this stock.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $350,915!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,492!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $473,142!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 25, 2024

Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.