Palantir Technologies (PLTR -1.56%) stock continues to move higher after it reported second-quarter earnings. The big-data company's stock price is up over 160% so far this year amid rising enthusiasm for its artificial intelligence (AI) capabilities.
Not surprisingly, the report brought investors mostly good news. Nonetheless, some struggles emerged, and investors need to weigh those challenges against its attributes to determine whether this software-as-a-service (SaaS) stock is still worth buying.
Let's look at three green flags and one red flag that emerged after reviewing the Q2 report.
Green flag: AIP's early success
Perhaps the best news in the report was the early success of the company's new artificial intelligence platform (AIP). The technology, which applies large language models to enhance its data analysis, has already attracted more than 100 clients. And more than 300 other companies expressed an interest in the platform.
This speaks not only to the success of Palantir's AI efforts but also to increased confidence from potential clients in Palantir's AI modules. Investors need to remember that Palantir has no direct competitors. With businesses continuing to seek its analysis capabilities, it can only bode well for the company's and the stock's long-term future.
Green flag: Palantir's financials
This success is likely contributing to Palantir's improving financials. For the second quarter, revenue was $533 million, rising 13% year over year. And the company limited the growth in operating expenses to around 1%, allowing for positive operating income and net income of $28 million. This is Palantir's third consecutive quarter of profitability under generally accepted accounting principles.
To this end, Palantir guided for at least $2.21 billion in revenue for 2023, an increase from the previous quarter when the minimum guidance was less than $2.19 billion.
It also reported positive free cash flow of $96 million. Given this improvement and the company's AI-driven technology, one can understand the massive gain in the stock price.
Green flag: Palantir is planning share repurchases
Another bullish sign for the stock price is the announcement that the board authorized share repurchases of up to $1 billion.
The company did not assign a time frame to this plan. Nonetheless, between its cash reserves and marketable securities, it holds about $2.9 billion in liquidity. Hence, the available cash is there.
Right now, just over 2.1 billion shares are outstanding. And as of the time of this writing, the stock sells for about $16.50 per share. At that price, Palantir could buy around 60 million shares, reducing the share count by about 3%.
Red flag: Slowing revenue growth combined with a rising stock price
Palantir's price-to-sales (P/S) ratio has climbed to 17, up from 7 at the beginning of the year.
Unfortunately for Palantir, that comes at a time when revenue growth slowed to 13% year over year. The company said that figure would have been 16%, excluding strategic commercial contracts, deals it made with special purpose acquisition companies (SPACs) that have generally not paid off. But that stands in contrast to 2022 when revenue grew by 24%, so the current economy may also be hurting growth.
The company said the strategic commercial contracts would only make up 3% of revenue for 2023, and such challenges do not negate the investment case for Palantir. Still, they could discourage investors from paying 17 times sales for the stock, which might weigh on its near-term performance.
Investing in Palantir stock
Palantir's successes undoubtedly make its stock a long-term buy. Despite its challenges, the now-profitable company continues to grow revenue by double-digit percentages. Moreover, the almost overnight success of AIP makes that growth likely to continue. And the share repurchases should make current shares more valuable.
Admittedly, the valuation has become elevated, and the negative effects of its SPAC investments could give investors pause in the near term. But as those investments fade to insignificance, the company and the SaaS stock should continue to benefit from the rising popularity and benefits of its analytics software.
