Big-data intelligence software company Palantir (NYSE:PLTR) released its fourth-quarter earnings on Tuesday, after which the stock took a nasty 12.8% fall. While the current quarter's financial results and qualitative achievements were quite positive, the stock still couldn't surmount sky-high expectations built in after it more than tripled since its September 2020 direct listing.

Still, this hot stock is worth keeping an eye on, as its business opportunities seem promising.

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Solid growth, bigger margins

For the quarter, Palantir posted impressive 40% revenue growth, along with adjusted operating income of $104 million, which was higher than expected and a big improvement over the previous year. For the full year, the company posted 47% growth, on the back of 77% growth in government customers. It also guided for a reacceleration of 45% growth for the first quarter of 2021.

Perhaps most encouraging was the continued expansion in contribution margins. Since Palantir made a technology breakthrough last year to deliver its products to customers in much less time, both gross costs and sales and marketing expenses actually decreased (outside of one-time increases in stock-based compensation following the direct listing). As a result, contribution margins nearly doubled from 33% to 62% in the fourth quarter.

New deals provide optimism

Palantir also signed an important distribution deal with IBM (NYSE:IBM), which will integrate Palantir's offering into the IBM Cloud Pak, immediately increasing Palantir's distribution to 2,500 IBM enterprise salespeople all over the world -- a massive increase over Palantir's own capabilities. It also innovated with its capabilities to collect data on weapons systems used the by the Department of Defense (DoD). That expands its total addressable market with the federal government, from the $60 billion of general government IT spend to over $250 billion of DoD weapons systems.

These exciting market expansions were tied in with new commercial-customer wins across a whole host of diverse industries, including California utility PG&E, international miner Rio Tinto, British Petroleum, and an unnamed Fortune 50 healthcare provider. Palantir also helped the U.K. government with the COVID vaccine rollout. 

Making sense of massive amounts of data is something that applies across a wide range of industries, and it appears that a diverse group of commercial customers are dipping their toes into seeing what Palantir has to offer. 

The company's sales cycle is a bit odd, since new customers typically pay very little in revenue at first. As they expand and implement Palantir's solutions, revenue increases before a final "scaled" phase, in which revenue accelerates with very little incremental cost. In that sense, many new exciting customer deals didn't contribute all that much to this quarter's financial results. But material revenue should be coming from these new wins in the future, if they expand to that final stage.

But the stock deserved to fall anyway

With all of this good news, Palantir's stock still fell hard. Why? Likely because the stock had more than tripled since the direct listing, which was already at healthy valuation. Additionally, the company's full-year 2021 guidance for only 30% growth may have underwhelmed some. That being said, I think it's likely management may have been conservative, as most companies like to beat their own guidance, especially when newly public. The ongoing pandemic is another reason companies may be issuing cautious full-year guidance right now.

Palantir also took the unique step of giving a 2025 revenue target of $4 billion, "or more." That's a lot of growth over 2020's $1.1 billion in revenue, equating to annualized revenue increases of about 30% for the next five years.

Fantastic, right? Well, yes, before you consider, again, Palantir's valuation. It already trades at a $52.3 billion market cap, even after Tuesday's pullback. Assuming 35% adjusted operating margins at that time, up from 23% forecast for next quarter, equates to $1.4 billion in 2025 adjusted operating income.

But Palantir also has high stock compensation, which surged this year with the direct listing, and even last year totaled $242 million. Stock-based compensation (SBC) is taken out of adjusted figures, but is a real cost that dilutes shareholders. Assuming SBC increases slightly and earnings are taxed at a 21% rate, Palantir will still likely be earning less than $1 billion in net income in 2025.

Paying over 50 times prospective earnings five years out is pretty expensive, with little margin of safety. Furthermore, growth stocks like Palantir could sell off if interest rates rise as the economy gets back to "normal" post-COVID.

That's why Palantir sold off, even after a solid earnings report with several big positives. It's also why the stock remains too expensive for me, even after this post-earnings haircut. But I'd keep it on my watch list, since the business itself appears to be quite strong. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.