Is Palantir Stock a Buy Now?

Palantir's (PLTR -0.23%) stock price tumbled 14% on Aug. 8 after the data mining firm posted its second-quarter earnings report. Its revenue rose 26% year over year to $473 million, which exceeded analysts' estimates by about $1 million but represented its slowest quarterly growth rate since its public debut in 2020.

On a generally accepted accounting principles (GAAP) basis, its net loss widened from $139 million to $179 million. On a non-GAAP (adjusted) basis, it posted a net loss of $21 million, compared with a profit of $98 million a year ago, and its net loss of a penny per share missed the consensus forecast by four cents.

Image source: Getty Images.

Palantir expects its revenue to rise 21% year over year in the third quarter and 23% to 24% for the full year. Both estimates broadly missed analysts' expectations for 29% growth in both the third quarter and the full year. And for the first time since its public debut, Palantir didn't reiterate its long-term goal of generating more than 30% annual revenue growth through 2025.

Those headline numbers looked dismal, but did investors overreact and create a new buying opportunity in this volatile and polarizing stock? Let's review Palantir's growth rates and valuations to decide.

Palantir's growth engines are running out of steam

Palantir operates two main data mining platforms: Gotham for government customers and Foundry for commercial customers. Both platforms collect data points from disparate sources, analyze them with artificial intelligence-powered algorithms, and help their customers make data-driven decisions.

During the second quarter, Palantir generated 56% of its revenue from its government customers and the remaining 44% from its commercial customers. Back when the company went public via a direct listing in September 2020, the bulls were initially impressed by the robust growth of its government business, which offset the slower growth of its commercial business.

But throughout 2021, the growth of Palantir's government business cooled off as the growth of its commercial business accelerated. The bulls claimed that was actually a positive sign, since it indicated the company could successfully expand beyond its rigid government contracts and reach a much broader market of commercial customers. Unfortunately, the growth of Palantir's government and commercial businesses both decelerated in tandem in its most recent quarter.

Data source: Palantir. YOY = Year over year.

The ongoing deceleration of its government business is disappointing since CFO Dave Glazer previously told investors that the business would experience a "reacceleration" in its core U.S. market during the company's first-quarter conference call in May. That slowdown indicates that Palantir could be facing stiffer competition from other data mining companies, as well as internally developed alternatives (like RAVEn) within the U.S. government.

Within Palantir's commercial business, its closely watched U.S. revenue only rose 45% year over year -- compared with 136% growth in the first quarter and 132% growth in the fourth quarter of 2021. The company attributed some of that slowdown to currency and macroeconomic headwinds.

During the Q2 conference call, CEO Alex Karp said he was still "driving the company to get to $4.5 billion" in revenue by 2025 -- which echoes its previous target for more than 30% revenue growth -- but stopped short of officially reiterating that long-term forecast.

Its margins are slipping

As Palantir's revenue growth cools off, its margins are contracting. Its adjusted gross margin slipped year over year, which suggests it's losing its pricing power in the crowded data mining market. Its adjusted operating margin also declined both sequentially and year over year.

Data source: Palantir. Non-GAAP basis.

Palantir expects its adjusted operating margin to drop to 11% in the third quarter and to decline about 13 percentage points to 18% for the full year. That ongoing compression casts a dark cloud over the company's goal of becoming profitable by 2025.

Its valuations are still too high

With a market cap of $20 billion, Palantir is still valued at 11 times this year's sales. That price-to-sales ratio is arguably too high for an unprofitable company that is generating 20% to 30% sales growth.

Salesforce, the cloud-based software giant that expects to grow its revenue by 20% this year, trades at six times that estimate. Twilio, the cloud-based communications company that expects to generate about 30% organic revenue growth through 2024, trades at about four times this year's sales.

Therefore, there's no real reason -- besides meme stock hype -- for Palantir to trade at a double-digit price-to-sales ratio. Once that hype subsides, its stock could be easily cut in half in this tough market for growth stocks. Simply put, investors should avoid Palantir and buy more promising tech stocks instead.