Palantir Stock Surges: Is There Still Room for Growth?

Overview of Palantir’s Performance and Stock Outlook

One of the standout stocks of 2023 is Palantir (NYSE: PLTR). The company’s impressive earnings and recent entry into the S&P 500 have driven its stock up by over 250% this year, as per the latest figures.

Despite its remarkable performance, investors are curious if Palantir remains a worthwhile investment following its significant gains. An analysis of the pros and cons related to Palantir’s stock can assist in making an informed decision.

Strong Growth Drives the Case for Buying Palantir

Palantir has risen to prominence as a top data analytics firm globally, particularly due to its partnerships with the U.S. government on projects like counter-terrorism and COVID-19 tracking. However, its recent expansion into artificial intelligence (AI) and commercial markets is generating considerable optimism among investors.

In recent quarters, Palantir’s growth in the U.S. commercial sector has boomed. The company added numerous commercial clients drawn to its AI platform. In the last quarter, U.S. commercial revenue surged 54% to $179 million, driven by what Palantir describes as “unrelenting AI demand.” Additionally, its commercial customer count rose 77% year over year, while the total contract value (TCV) increased by 37% to nearly $300 million.

Growth is also notable with Palantir’s largest client, the U.S. government, which is increasingly integrating AI into its operations. Government revenue rose 40% last quarter, reaching $320 million. Notably, various sectors of government, including the White House, Congress, and Defense, are embracing large language models (LLMs).

The most significant potential for Palantir lies in advancing clients from AI prototypes to full-scale production. Although the company is acquiring many new clients, the greater opportunity will arrive when it expands services within these existing clients. The firm reported a strong net dollar retention rate of 118%, which indicates growth from clients who have been with the company for over a year, not including newer clients.

This expansion strategy with recent AI clients could unlock even greater revenue strides ahead, suggesting that future revenue growth may positively impact the stock price.

Image source: Getty Images.

High Valuation and Insider Selling Raise Concerns for Investors

Despite Palantir’s strong performance, its stock valuation raises questions. Great companies may not always translate to great stock buys, as valuation is key.

Currently, the stock’s forward price-to-sales (P/S) ratio stands at around 40 times anticipated earnings for the next year. Even after accounting for its net cash, the enterprise value to sales (EV/S) multiple remains high at 39 times. By comparison, during the peak of software-as-a-service (SaaS) valuations, similar stocks traded at an EV/S multiple of 19.4, while achieving revenue growth of approximately 30%, slightly below Palantir’s recent performance.

PLTR PS Ratio (Forward 1y) data by YCharts

Moreover, several Palantir executives appear to acknowledge the stock’s inflated valuation. CEO Alex Karp has notably increased his selling activity, having sold over 33 million shares for more than $1.6 billion in gross proceeds since September. Additionally, chairman Peter Thiel sold over $1 billion in stock during September and October, with other insiders also engaged in selling their shares.

Conclusion: Insights for Potential Investors

When contemplating Palantir, investors should heed the actions of company executives. While Palantir is a robust company, its current valuation is now twice that of peak SaaS valuations from a few years back, albeit with comparable growth rates.

Consequently, it is advisable not to initiate new purchases of Palantir stock. Investors may also want to contemplate taking some profits following its impressive run.

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*Stock Advisor returns as of November 18, 2024

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.