Think Palantir Stock Is Expensive? This Chart Might Change Your Mind

Palantir (NASDAQ: PLTR) has managed to be relatively resilient amid the recent turmoil in the stock market. As of this writing, the stock is up 17% year to date despite pulling back 27% from the all-time high it reached in February.

This is still a premium-priced stock, though. Palantir trades at 158 times this year's expected earnings and 55 times expected sales. That's an extremely bullish valuation -- and one that looks even pricier considering macroeconomic headwinds could slow the company's recent momentum.

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While there's no doubt Palantir is an expensive stock by these conventional valuation metrics, there is another indicator that puts the stock's price tag in a more reasonable light.

Palantir is generating a lot of cash

Even though Palantir stock looks quite expensive on a price-to-earnings basis, there are some good reasons why investors have been willing to pay a premium to own the stock. For example, just take a look at the chart below, which tracks the company's sales and free cash flow (FCF) over the last year.

Data by YCharts.

For 2024, Palantir generated FCF of $1.14 billion on revenue of $2.86 billion. In other words, the company is generating $0.40 in free cash flow for every $1 in sales recorded. That's a fantastic margin -- and one that looks even better in the context of Palantir's top line momentum.

Last year, revenue increased 29%, and management projects growth will increase to 31% this year (at the midpoint of the guidance range). The artificial intelligence software provider is posting a FCF margin that would be enviable for a profitable but slow-growing, mature business, but its revenue growth has accelerated for six straight quarters.

With Palantir having established itself as a go-to provider of powerful analytics tools for both commercial and government clients, the company appears poised to maintain its strong growth trajectory. Meanwhile, its strong FCF margin will help Palantir weather any trade war and other macroeconomic risks. In that light, the stock's price tag isn't as unreasonable as typical valuation metrics might suggest.

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Keith Noonan 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.