Is Palantir Technologies Stock a Buy?

Palantir Technologies' (PLTR -3.12%) stock sank 21% to an all-time low on May 9 after the analytics firm posted its first-quarter earnings report.

Revenue rose 31% year over year to $446 million, which exceeded analysts' estimates by $2.5 million. However, adjusted net income declined 46% to $45 million, or $0.02 per share, which missed analysts' expectations by $0.02. On a generally accepted accounting principles (GAAP) basis, the company's net loss narrowed from $123 million to $101 million.

In the second quarter, Palantir expects revenue to grow about 25% year over year to $470 million -- which missed the consensus forecast for 29% growth and would mark its slowest growth since its public debut. Nevertheless, the company maintained its long-term target of generating at least 30% annual revenue growth through 2025.

Image source: Getty Images.

Palantir's mixed numbers rattled investors, and a deeper dive exposes some other pressing problems. Let's review those issues and see if Palantir's stock is still worth buying at these depressed levels.

Palantir's government business is stalling out

During the first quarter, Palantir generated 54% of its revenue from government clients. The remaining 46% came from commercial customers.

When Palantir went public via a direct listing in 2020, its government business was growing a lot faster than its commercial business. But over the past three quarters, commercial business has grown significantly faster than government business -- which decelerated over the same period.

Data source: Palantir. YOY = year over year.

That slowdown is troubling since one of Palantir's long-term ambitions is for its government-facing Gotham platform to become the "default operating system for data across the U.S. government." It also coincides with recent reports that Immigration and Customs Enforcement (ICE) -- which deployed Gotham to track and deport undocumented immigrants -- plans to replace Gotham with an internally developed system called RAVEn.

If other government agencies follow ICE's lead, Palantir's growth in new government contracts could eventually stall out. However, a new five-year contract with the Department of Health and Human Services (HHS) and a recent expansion of its partnership with the Centers for Disease Control and Prevention (CDC) indicate those fears might be overblown. In addition, the Russo-Ukrainian war might prompt U.S. agencies to expand their contracts with Palantir to improve their intelligence-gathering capabilities.

On the bright side, Palantir's commercial business continues to grow as it leverages its battle-hardened reputation to gain more enterprise customers. U.S. commercial revenue surged 136% year over year in the first quarter -- which represented its fifth straight quarter of accelerating growth.

Declining retention rates and margins

Palantir ended the first quarter with a net dollar retention rate of 124%, but that still represented a decline from 131% in the fourth quarter. Softer-than-expected guidance for the second quarter also suggests the company's retention rates will continue declining.

Adjusted gross and operating margins also declined both sequentially and year over year in the first quarter.

Source: Palantir. Note: On an adjusted basis.

During the conference call, CFO Dave Glazer said that contraction would continue with a "base case" adjusted operating margin of 20% in the second quarter as it accelerates its investments "in advance of anticipated contract awards." Glazer expects Palantir to report an adjusted operating margin of 27% for the full year -- compared to 31% in 2021.

Is Palantir getting too cheap to ignore?

Palantir's slowing growth, rising expenses, and stubborn insistence on maintaining its 30% revenue-growth target through 2025 -- even though it's pinned to "anticipated" contracts in the future -- raises red flags. However, the company's weighted-average share count only rose 1% sequentially in the first quarter. This indicates its aggressive dilution -- which has been a major issue ever since its direct listing -- is finally ending.

At $7.50 per share, Palantir now trades at less than eight times this year's sales. Unfortunately, many other comparable growth stocks are trading at even lower valuations. For example, Twilio, the cloud communications company that expects to grow its organic revenue by more than 30% annually through 2024 trades at five times this year's sales.

Therefore, I believe Palantir stock could easily drop to $5 in this tough market for unprofitable growth stocks. I once owned (and sold) Palantir, but I can't recommend buying it back in this difficult market -- especially when plenty of other higher-quality stocks are still on sale.