Artificial intelligence (AI) has been a significant focus on Wall Street throughout this year. Software specialist Palantir Technologies (PLTR 1.00%) has been a prime example. Its stock is up more than 100% over the past 12 months. Nobody wants to chase a stock's tail, and buying a stock that's up so much can feel like exactly that.
However, the buying window could still be wide open. Palantir has been hotly debated in the investing community, but the evidence shows that the company is growing and that its performance could last well into the future. Here are the ins and outs of why the stock is still a buy today.
1. Its solutions are needed more than ever
Data has become one of the world's most important resources. Using data effectively can give companies and governments a competitive advantage. Palantir builds custom software solutions for customers on its four platforms, Gotham, Foundry, Apollo, and AIP, that help organizations analyze data to make smarter, real-time decisions.
Palantir caters to two types of customers: government and commercial. Approximately 56% of Palantir's revenue comes from governments, primarily the United States and its allies. The rest are commercial customers, primarily U.S. companies, which numbered 161 as of the second quarter of this year.
Unfortunately, the world continues to face geopolitical challenges. Because America is such a central force in these affairs, it could fuel demand for defense spending over the coming years. Last week, the U.S. Army awarded Palantir a $250 million contract to help develop its AI and machine learning capabilities.
Meanwhile, commercial business is steadily expanding as more companies invest in maximizing their data's potential. The company's U.S. customer count grew 38% year over year in Q2, and revenue grew 20%.
In all, analysts are optimistic about Palantir's long-term growth. While estimates call for about $2.2 billion in total revenue this year, they believe Palantir's sales will cross $3 billion by 2025 and upward from there.
2. Spinning the profit flywheel
Palantir's financials hit a turning point (in a good way) late last year. You can see below how free cash flow and net income dramatically rose over the past four quarters.
Palantir's earnings per share (EPS) has been positive for the past three quarters. This is great news for long-term investors; you always hope a company will reach a point where revenue starts outrunning costs, creating business profits. Moving forward, EPS should rise quickly as revenue growth continues.
PLTR Revenue (TTM) data by YCharts
Palantir is also flush with cash, with $3.1 billion on its balance sheet and no debt. The company also announced a $1 billion share repurchase program last quarter, which should begin reducing outstanding shares, further supporting higher EPS.
3. The share price isn't reflecting earnings growth
The market doesn't seem to be pricing in the company's earnings growth. Yes, shares are up nicely over the past year, but there could still be room for more. The stock trades at a forward P/E of 78, which sounds high (the S&P 500 trades at a P/E of just 19). But it's not entirely unreasonable when you add the context of expected earnings growth.
Analysts believe Palantir's EPS will grow by an average of 66% annually over the coming years, a blistering pace. When comparing the valuation to expected growth, you get a PEG ratio of 1.2. That's not super cheap, but it looks like an acceptable price tag for long-term investors. For reference, a PEG ratio under 1 is typically considered cheap.
PLTR PE Ratio (Forward) data by YCharts
Nothing is risk-free; the stock could remain volatile. After all, Palantir traded at over $30 a couple of years ago. Day to day, the market is unpredictable. Still, earnings growth should lift stocks higher over time. With continued demand for its services and potentially explosive earnings growth, Palantir is worth a closer look.
