Palantir (PLTR -0.23%) stock is soaring this year. Earlier this month, the company reported per-share earnings of $0.05 on revenue of $525 million, while the average analyst estimate had called for per-share earnings of $0.04 on sales of $506 million.
Between the sales and earnings beats, some encouraging guidance, and excitement surrounding artificial intelligence (AI) initiatives, Palantir stock has seen a strong post-earnings rally, and the company's share price is now up roughly 83% year to date. If you're wondering whether the stock is still a buy on the heels of its explosive gains, read on for a look at bullish and bearish catalysts and dynamics that could shape its performance going forward.
Green flag: Profitability and opportunities in AI
Palantir's first-quarter results and guidance were solid. In addition to its public sector customers, Palantir has been seeing rising demand from the private sector. The company's U.S. commercial customer count increased 50% year over year in the first quarter to reach 155, and revenue from the cohort grew 26% and helped push overall revenue up 18% compared to the prior-year period.
Posting $17 million in net income in the period, Palantir marked its second consecutive quarter of profitability on a GAAP basis. Not only did the recent first-quarter earnings results come in ahead of the market's expectations, the company expects to continue posting profits throughout the year. With the shift into profitability occurring at the same time the company is rolling out new AI technologies, the narrative surrounding the stock has shifted into bullish mode.
CEO Alex Karp says the demand he's seeing for the company's Artificial Intelligence Platform (AIP) service is unprecedented, and executives at the company have generally been adamant that Palantir has a huge lead in AI that's currently being underestimated. Check out what Karp had to say when asked on the company's Q1 call about pricing strategies in the AI services space:
Within the context of remaining profitable, our strategy on AI is to just to take the whole market. We have no pricing strategy. We're going to create a lot of value. We're going to get hundreds of customers, and we will price it as we go. One of the things we've seen over and over again is when you're ahead of the market, you need to take territory.
Palantir could be in the early stages of seizing massive opportunities in AI, and it appears to be on track to pursue related growth while remaining profitable. If the company can make good on its bold outlook in the AI space, there's a good chance shares can climb significantly above current levels.
Red flag: Growth-dependent valuation and limited visibility
As recently as May 2022, Palantir was still forecasting it would post annual sales growth of 30% or more annually through 2025. But the company actually wound up posting sales growth of 24% in 2022, and it's forecasting another significant deceleration this year.
For the second quarter, Palantir is guiding for sales to come in between $528 million and $532 million -- representing growth of roughly 12% year over year at the midpoint of the target. On the other hand, the company is guiding for full-year sales to come in between $2.19 billion and $2.24 billion, suggesting growth of roughly 16% at the midpoint of the guidance range.
While macroeconomic headwinds are almost certainly tamping down on the data-software specialist's growth potential, it's not clear the "unprecedented" demand that Karp has cited for the AIP service is driving much top-line momentum yet. The company has tended to be aggressive in its forecasting, and investors may want to take effusive statements about competitive advantages in the AI space with a grain of salt.
PLTR PS Ratio (Forward) data by YCharts
At today's prices, Palantir is valued at approximately 55 times non-GAAP (adjusted) earnings and 11 times expected sales. Given the company's heavily growth-dependent valuation and somewhat uncertain business outlook, it's fair to say that Palantir stock presents significant downside risk.
Is Palantir stock a smart buy right now?
Even after an explosive rally across this year's trading, Palantir stock still trades down roughly 70% from the high it hit in January 2021. This is a volatile stock with a forward-looking valuation, and charting its future business trajectory involves a heavy dose of speculation.
If you have a high risk tolerance and expect the company to score big wins with its AI technologies, it could make sense to add the stock right now. Shares are still down big from their peak, and the broader AI revolution is just getting started.
On the other hand, investors without a high risk tolerance should probably steer clear of the stock for now. There's not much visibility on how Palantir's business will perform, and there are other more established tech companies with strong positions in AI and lower risk profiles.
