Is Palantir Stock a Buy Now?

Palantir's (PLTR 3.73%) stock plunged 16% to a 52-week low on Feb. 17 after the company posted its fourth-quarter results.

The data analytics company's revenue rose 34% year over year to $433 million, beating analysts' expectations by $15 million. But its net loss widened from $148 million to $156 million on a generally accepted accounting principles (GAAP) basis, while its non-GAAP earnings of $0.02 per share missed the consensus forecast by two cents.

Should investors buy some shares of this former high-flying stock -- which has declined nearly 70% since hitting a record high of $39 last January -- or should they avoid it? Let's dig deeper to find out.

Image source: Getty Images.

How fast is Palantir growing?

Palantir operates two main platforms: Gotham for government agencies and Foundry for enterprise clients. Both platforms aggregate data from disparate sources to help clients make data-driven decisions.

In 2021, Palantir generated 57% of its revenue from government clients and 41% of its revenue from commercial clients. Here's how rapidly those two core businesses grew in 2020 and throughout 2021:

Data source: Palantir. YOY = Year-over-year.

When Palantir went public via a direct listing in Sept. 2020, the critics claimed it would struggle to expand its commercial business to reduce its dependence on rigid U.S. government contracts.

However, the growth of Palantir's commercial business actually accelerated throughout 2021 as it signed more deals with domestic customers. For the full year, its U.S. commercial revenues rose a whopping 102% and offset the gradual deceleration of its government business.

Palantir expects its revenue to rise 30% year over year in the first quarter of 2022, which exceeds analysts' expectations for 29% growth. It also reiterated its long-term goal of growing its revenues by at least 30% each year through 2025. Analysts expect its revenue to rise 32% to $2 billion in 2021.

But can Palantir ever generate a profit?

Palantir's commercial business continues to expand as its government business generates stable growth, but there's still a lot of doubt about its ability to break even on a GAAP basis.

But looking beyond Palantir's adjusted gross and operating margins -- which exclude its stock-based compensation expenses, employer-related taxes, and other one-time charges -- we can see that its GAAP gross margins are gradually improving. Its GAAP operating margins, while negative, are also steadily clawing toward the breakeven point:

Source: Palantir.

However, Palantir still expects its adjusted operating margin to dip to 23% in the first quarter of 2022 and 27% for the full year as it ramps up its investments. It didn't provide an outlook for its GAAP margins.

It could still take years for Palantir to achieve a full-year profit, but analysts expect its GAAP net loss to narrow from $520 million in 2021 to $205 million in 2022. That progress is encouraging, but all that red ink also leaves Palantir highly exposed to inflation and rising inflation rates.

Its valuations are still an issue

Palantir's stock still trades at about 12 times this year's sales after its post-earnings plunge. That valuation might seem reasonable for a company that is generating more than 30% growth each year, but it's easy to find more fundamentally stable stocks at comparable valuations -- as well as cheaper stocks with similar revenue growth rates.

ServiceNow (NOW 1.02%), which expects to grow its annual revenue at a compound annual growth rate (CAGR) of 21% between 2021 to 2026, might initially seem pricier than Palantir at 15 times this year's sales. But, it's firmly profitable by both GAAP and non-GAAP measures.

C3.ai (AI 3.02%), which expects its revenue to rise 35%-37% this fiscal year (which ends this April), trades at just nine times that estimate. Like Palantir, C3.ai provides AI and data-crunching tools for government and enterprise customers. It's also unprofitable on a GAAP basis.

Based on these comparisons, Palantir's stock could have limited upside potential. They also suggest that its rally last year was largely driven by market hype instead of its actual growth.

Should you buy Palantir today?

I bought Palantir at under $10 shortly after its direct listing, sold part of my shares in the mid-$30s last January, and sold the rest in the high-teens earlier this year. I still admire the business, but its valuations and the current market climate indicated it was smarter to sell the stock and check back on it later.

I'm still optimistic about Palantir's long-term prospects, but I think the stock could sink further until its price-to-sales ratio hits the high single digits. Once that happens, I'll consider starting a new position in Palantir again.