Is It Too Late to Buy Palantir Stock?

Palantir's (PLTR 3.19%) stock price surged 21% on Feb. 14 in response to its fourth-quarter earnings report. The data mining and analytics company's revenue rose 18% year over year to $509 million, which beat analysts' estimates by $4 million.

Its adjusted net income more than doubled from $45 million to $96 million, or $0.04 per share, which also cleared the consensus forecast by a penny. On a generally accepted accounting principles (GAAP) basis, it generated a net profit of $31 million, which improved from a net loss of $156 million a year ago and represented its first-ever quarterly profit.

Image source: Getty Images.

Palantir's stable growth and improving GAAP profits impressed investors, but its stock price remains more than 75% below its all-time high from over two years ago. Does Palantir's stock still have more room to run after its latest post-earnings pop, or is it too late to accumulate more shares?

Palantir's growth is still cooling off

For the full year, Palantir's revenue rose 24% to $1.91 billion, decelerating from its 41% growth in 2021 and 47% growth in 2020. That also broadly missed its own target of "30% or greater" annual revenue growth through 2025.

In 2022, Palantir generated 56% of its revenue from its government business, while another 43% came from its commercial business. Here's how those two core businesses fared over the past year.

Data source: Palantir. YOY = Year over year.

Palantir's government business held steady, but its commercial segment -- which it repeatedly touted as a way to reduce its long-term dependence on rigid government contracts -- struggled with the macro headwinds. It also faced tough competition from similar platforms like Salesforce's Tableau, Splunk, and Alteryx.

During the conference call, chief revenue officer Ryan Taylor said that even though the tech sector "has been facing one of the most challenging operating environments in years," Palantir still expected its U.S. commercial business (which accounted for 40% of its commercial revenues in 2022) to "reaccelerate in 2023" as it gains more customers.

Yet Palantir's outlook suggests that acceleration won't completely offset the slower growth of its other businesses. It expects its revenue to rise just 13%-14% year over year in the first quarter of 2023 and increase 14%-17% for the full year.

But will Palantir's profits continue to rise?

Palantir's revenue growth is cooling off, but the bulls focused on its first quarter of GAAP profitability -- which it attributed to a 22% year-over-year reduction in its stock-based compensation, narrower losses from its marketable securities, and the acquisition of a joint venture in Japan. But on a non-GAAP basis, which excludes its stock-based compensation and other one-time benefits and expenses, Palantir's gross and operating margins declined from a year ago (but still rose sequentially).

Data source: Palantir. Non-GAAP basis.

For the first quarter of 2023, Palantir expects its adjusted operating margin to decline year over year and sequentially to 18%-19%. But for the full year, it expects its adjusted operating margin to slightly expand to 22%-24% -- compared to 22% in 2022 -- as it reins in its spending and cuts costs. It also expects to stay profitable on a GAAP basis for the full year.

Is Palantir's stock reasonably valued right now?

At $9 per share, Palantir has an enterprise value of $13.5 billion, or 6 times its revenue estimate for 2023. At its peak of $39 per share in Jan. 2021, it was valued at $68.1 billion -- or 44 times the $1.54 billion in revenue it would generate in 2021.

Palantir stock looks cheap relative to those frothy valuations, but it isn't a bargain compared to larger tech companies that are growing at similar rates. Salesforce, which is expected to generate 17% sales growth this year, trades at 5 times that forecast. Splunk, which is expected to generate 30% sales growth this year, trades at less than 6 times that estimate. Palantir won't command a higher valuation unless its revenue growth accelerates again. It's encouraging to see it focus on generating stable GAAP profits, but that's also a clear sign that its high-growth days are over.

If you believe Palantir will achieve its goal of becoming the "default operating system for data across the U.S. government" and leverage that battle-hardened reputation to gain more commercial customers over the long term, it might still have room to run. But the stock simply isn't cheap yet, so investors should wait for more of its post-earnings froth to dissipate before picking up some shares. In short, I think it's a bit too late to chase Palantir's near-term rally.