Palantir Technologies Inc. (NYSE:PLTR) recently released its latest quarterly results, and the market largely cheered the results as the stock has soared higher since the results came out. That being said, we remain firmly bearish on the stock and share in this article why we are reiterating our Sell rating.

PLTR Stock Q3 Positives

While we are overall negative on the stock, we do believe that the company itself is fundamentally healthy and is accomplishing some really good things. For example, PLTR has demonstrated impressive growth recently in several key areas of its business. Their overall revenue grew by 16.8% year-over-year during the quarter, reaching $558 million, which surpassed analyst consensus expectations. Perhaps the most impressive number from the report was that they grew their international business by 15% to a total revenue of $134 million. Given that this had been an area of significant struggle for the company recently, an acceleration of growth to a mid-teens rate is quite notable and could bode well for the company if they can continue to accelerate that growth rate moving forward.

Moreover, the remarkable 33% year-over-year growth in PLTR’s U.S. commercial revenue showed the staying power of PLTR’s most dynamic business and demonstrates the company’s ability to be a major data analytics and AI player for a broad array of clients, rather than being confined to strictly being a government/defense contractor. The tripling of users for PLTR’s Artificial Intelligence Platform (“AIP”) demonstrates the company’s growing influence in the AI sector and bodes well for continued strong commercial growth for quarters and years to come.

Perhaps most important of all is that the company has now achieved GAAP profitability for four consecutive quarters, proving that it can truly generate value for shareholders and has a sustainable business model instead of just chasing unprofitable topline growth financed by continuous equity issuance.

PLTR Stock Q3 Negatives

However, there were also some negatives. Stock-based compensation expenses remain elevated and likely to increase in Q4, continuing to dilute shareholders in the process. While the company touted its buyback authorization on its Q2 earnings call, nothing was said about it on the Q3 earnings call, proving that it was purely a publicity stunt by management (much like its short-lived investment in gold bars was previously).

Moreover, government revenue only grew at a 10% year-over-year rate, continuing a recent trend of fairly slow government revenue growth. While the U.S. commercial business is posting very robust growth numbers, the slowdown in the government business is weighing on the company’s overall growth performance and calling into question the ultimate total growth runway of the company. While the recent pickup in international growth is promising, it remains below the company’s overall average growth rate and will need to pick up considerably for the company to achieve its full long-term potential. Additionally, the company’s dependence on large deals to continue fueling growth and the potential for operational risks as Palantir rapidly expands its AI business are also areas of concern.

Why PLTR Stock Is A Sell

PLTR is clearly expanding its presence in commercial markets, achieving some improvement in international growth, leveraging and enhancing its AI capabilities, and achieving consistent profitability. That said, these strengths are ultimately not enough for us to upgrade the stock from being a Sell for the following reasons:

Valuation: The stock trades at a very rich valuation right now, as the company’s lack of execution on its buyback over the past quarter (despite the company having plenty of cash on its balance sheet and the stock price plummeting significantly during parts of the quarter) demonstrates. It currently trades at nearly 19 times its LTM revenue and nearly 16 times its NTM revenue. Moreover, it trades at over 52 times its NTM EBITDA, nearly 70 times its NTM normalized earnings, and over 81 times its NTM free cash flow (translating to an NTM free cash flow yield of just 1.2%). In an environment where 10-year treasury yields are nearly four times PLTR’s free cash flow yield, it is pretty difficult to justify its current valuation multiple.

Additionally, while some may think that 16 times NTM revenue and 70 times NTM normalized earnings are not outrageous for a leading AI software company, the reality is that PLTR is not truly a software company. PLTR’s business model has often been likened to being a hybrid between a software company and a consulting company due to its labor-intensiveness. As a result, it does not scale nearly as easily as a pure software-as-a-service or even an enterprise software business model. As a result, its profit margins have not been increasing as rapidly as one might expect relative to its strong rate of revenue growth. For example, over the next two years, its revenue is expected to grow at a 20.2% CAGR whereas its normalized earnings per share are only expected to grow at a 20.5% CAGR, reflecting a very slight expansion in its profit margin. As a result, its valuation multiples appear to be far too high relative to the bottom-line growth potential of the company.

Decelerating Revenue Growth: Since PLTR went public, there has been a notable deceleration in Palantir’s revenue growth, from nearly 50% to the mid-teens most recently. In fact, management has abandoned its original guidance for over $4 billion in 2025 revenue, and the company is now expected by the consensus of Wall Street analysts to generate only $3.2 billion in revenue in 2025 revenue. This deceleration could stem from several issues, including market saturation, increased competition, or a plateau in the adoption rate of Palantir’s services. It appears that the market is counting on AI to accelerate PLTR’s growth, but thus far there has not been much concrete evidence that this is happening in a meaningful way.

While analysts do seem to expect that AI will bolster PLTR’s revenue growth rate, it is still only expected to grow its topline at a 23.7% CAGR through 2027:

Recession Concerns: Moreover, given that it appears that we are headed for a recession, it is entirely possible that PLTR may face some stiff growth headwinds moving forward. This is because in an economic downturn, companies often scale back on new and unproven technologies in order to cut costs and maximize short-term profitability during challenging economic periods.

Moreover, given the massive government deficits facing the United States and many of its allies right now, if tax revenues take a hit during a recession, it is very possible that they may cut back on nonessential spending across their departments. This poses a risk to Palantir, as its big data solutions, while valuable, may not be perceived as critical to near-term profitability and operations, resulting in delayed and/or reduced spending on Palantir’s services by current and prospective clients.

Investor Takeaway

While PLTR is clearly a prominent player in the AI and big data analytics space for both government and commercial enterprises, the current valuation is just too rich in our view. The stock will need to dramatically accelerate the growth rate of its government and international segments while sustaining its commercial growth rate and/or find a way to improve its economies of scale significantly in order to justify the lofty expectations being placed on it by Mr. Market. The elevated level of interest rates and growing risks of a recession further exacerbate the valuation issue at PLTR.

The company is clearly doing fine fundamentally and continues to generate consistent profitability for shareholders, which is a very good thing. However, until the valuation picture improves considerably, we remain bearish on the stock.