What happened
Palantir Technologies (PLTR -2.60%) delivered eye-catching growth numbers in its most recent quarter, causing the stock to move up nearly 14% for the week as of Friday morning trading.
So what
Palantir shares hit the fast lane on Thursday after the company reported second-quarter adjusted earnings of $0.04 per share on revenue of $375 million, topping analyst expectations for $0.03 per share in earnings on sales of $353 million. The company, which provides advanced data analytics tools for government and corporate customers, said it added 20 new customers in the quarter. It also forecast 30% annual revenue growth for the next five years.
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Palantir has been around nearly two decades, and its software is perhaps best known for helping U.S. spy agencies locate Osama bin Laden. But it only went public last year, and lately has been attempting to transition from being solely a government-focused contractor to more of a commercial software vendor. The growth was viewed as a sign of progress toward that goal.
Palantir shares also received a bit of a Cathie Wood boost. The closely watched investor added about 5.6 million Palantir shares to her portfolio of ARK Invest exchange-traded funds (ETFs) after the earnings announcement.
Now what
Palantir is a great company with great tech. But the jury is still out on whether this is a good stock.
Assuming the company's 30% annual growth target for the next five years is hit, Palantir today trades at 13 times what it expects to generate in revenue in 2026. That's outrageously high for a government contractor, and the company's efforts to become more of a commercial software vendor are preliminary at best.
In the most recent quarter, government clients accounted for 61% of total revenue, and with the government side growing at a 66% rate compared to commercial's 28% rate, Palantir is on track to remain government-focused. And while 28% commercial growth to $144 million in revenue is impressive, it is well short of commercial-focused data analytics company Snowflake, which saw product revenue increase 110% year over year to $214 million last quarter.
Palantir has strong tech that customers want, but the company will need to dramatically shift revenue trends in the years to come to justify its current valuation. Management is aware of this and is working hard to build the commercial side of it, but that is no easy task. Investors are fully justified in being excited about Palantir's quarter, but they should be mindful of the challenges that still lie ahead.
