Even on the heels of a sell-off following its second-quarter results, Palantir Technologies (PLTR 0.51%) has been one of this year's hottest stocks. Thanks to surging interest in artificial intelligence (AI) and some stronger-than-expected earnings results, the company's share price rocketed 145% higher across 2023's trading.
Is the data specialist's bullish run still in the early stages of unfolding, or has the company's valuation been stretched to the point where the stock is now too risky? If you're thinking about investing in the company, read on for a look at bullish and bearish dynamics that could play key roles in shaping Palantir's stock performance.
Green flag: Palantir has big opportunities in AI
In addition to shifting into profitability on a generally accepted accounting principles (GAAP) basis, Palantir's new AI tools and services have played a driving role in its stock gains this year. The company quickly emerged as a top player in the artificial intelligence space.
Palantir rolled out its Artificial Intelligence Platform (AIP) in the second quarter, and the new service could be in the early stages of driving big shifts for the company. AIP provides tools that make it possible for customers to harness the power of large language models across their organizations.
The service could help the company significantly expand its customer base and boost net revenue retention rates. There may already be some evidence of this starting to take place. Palantir's customer count rose 38% year over year and 8% on a sequential quarterly basis in Q2.
More than 100 business customers are already using AIP, and it's possible that adoption and usage of the platform are still just starting to scale. In his Q2 letter to shareholders, Palantir CEO Alex Karp also says that his company is in talks with 300 other enterprises that are potentially interested in adopting the platform.
AIP and other AI tools could play a driving role in helping Palantir attract new customers and expand relationships with those that are already using its platform.
Red flag: Growth-dependent valuation creates risk
Palantir's revenue grew 13% year over year in the second quarter, with commercial revenue increasing 10% year over year and government revenue climbing 15%. Given that many businesses are taking a more cautious approach to spending in the current macroeconomic environment, those aren't bad results. But the company's sales expansion has to be viewed in the context of its valuation.
With the company's customer count climbing significantly in Q2, Palantir is now guiding for roughly 16% year-over-year sales growth in the third quarter. On the other hand, the company's current valuation may be significantly more aggressive than its current rate of sales expansion can justify.
PLTR PE Ratio (Forward) data by YCharts
With a market cap of roughly $33.8 billion, Palantir is valued at approximately 68 times this year's expected earnings and 15 times expected sales. And while Palantir actually raised its full-year sales guidance to revenue above $2.2 billion, there are some signs that demand may be a bit uneven along some lines.
The data specialist ended the second quarter with $968 million in remaining performance obligations (RPO), up from its $936 million in RPO at the end of first quarter, but down from the roughly $1.2 billion in RPOs it had at the end of last year's second quarter. So while Palantir continues to add customers at an encouraging clip and appears to see plenty of interest in AIP, the momentum looks somewhat limited in terms of RPO. At the very least, some commercial customers appear to be shifting to shorter contract terms.
Is now the right time to buy Palantir stock?
Despite the big share price pullback following its Q2 release, Palantir's valuation remains heavily forward-looking. Some significant tailwinds from AI and strong sales and earnings growth are already priced into the company's stock. Based on the company's current valuation, it's assumed that sales and earnings growth will actually accelerate substantially.
Accordingly, investors should focus on and assess the company's AI initiatives and opportunities when determining whether to buy the stock. For more risk-averse investors, the data software specialist's current valuation may be far too speculative. On the other hand, if you think that Palantir is in the early stages of capitalizing on the artificial intelligence revolution, the stock could make for a sensible portfolio addition.
