Is It Too Late to Buy Palantir Technologies Stock?

Palantir Technologies' (PLTR 0.68%) stock surged 20% on Nov. 2 after the data mining and analytics company posted its third-quarter report. Its revenue rose 17% year over year to $558 million and exceeded analysts' expectations by $2 million. It generated a net profit of $72 million, compared to its net loss of $124 million a year ago, while its adjusted earnings of $0.07 per share cleared the consensus forecast by a penny.

Palantir's growth rates seem healthy, but is it too late to buy its stock after its post-earnings pop? Let's review its growth and valuations to decide.

Image source: Getty Images.

Its revenue is accelerating again

Palantir's government business, which is powered by its data mining platform Gotham, generated 55% of its third-quarter revenue. The remaining 45% came from its commercial business, which serves enterprise customers with its Foundry platform.

Palantir's government business suffered a slowdown over the past year as it grappled with the uneven timing of new government contracts. Its commercial business also struggled as the macro headwinds drove large companies to rein in their spending. As a result, total revenue growth decelerated through the second quarter of 2023.

Data source: Palantir. YOY = Year-over-year.

But in the third quarter, revenue growth accelerated again as the robust increase of its commercial business offset the slowing growth of its government business. That reacceleration was mainly driven by its U.S. commercial business, which raised its revenue 33% year over year and accounted for 46% of its total commercial revenue.

For the fourth quarter, Palantir expects its revenue to rise 18% year over year. For the full year, it slightly raised its guidance from "in excess of $2.212 billion" to "between $2.216 billion to $2.22 billion," which would represent about a 16% increase from 2022.

That would still represent a slowdown from its 24% gain in 2022 and broadly miss its original plan for generating at least a 30% revenue boost through 2025. However, those estimates also suggest its business is stabilizing in this difficult macro environment.

Its profits are rising, and it might join the S&P 500

Palantir's margins also continue to expand as its revenue growth stabilizes. Its adjusted gross margin rose 2 percentage points year over year to 82% during the third quarter, which suggests it still has plenty of pricing power in its niche market of aggregating data from disparate sources. Its adjusted operating margin expanded 12 percentage points to 29%, which represented the metric's fourth consecutive quarter of a year-over-year increase.

During the conference call, chief financial officer David Glazer said Palantir had been "able to flatline expenses for four consecutive quarters while investing significantly in our products."

As its margins rose, it reined in its stock-based compensation to generate consistent profits on the basis of generally accepted accounting principles (GAAP). As a result, it has remained GAAP profitable for four consecutive quarters -- which makes it eligible to join the S&P 500.

There's no guarantee that will actually happen, but an inclusion in the S&P 500 would automatically add Palantir to index funds and exchange-traded funds that track the benchmark index.

That inclusion could stabilize Palantir's volatile stock price. It might also convince its insiders -- who still sold more than 60% as many shares as they bought over the past three months -- to become net buyers again.

But does Palantir deserve its premium valuation?

Analysts expect Palantir's revenue to grow 16% this year as its adjusted EPS nearly quadruples. For 2024, they expect its revenue and adjusted EPS to grow 19% and 17%, respectively, as its government business stabilizes and its commercial business expands.

Those growth rates are stable, but they're not too impressive compared to other cloud-based software companies. The digital workflow services provider ServiceNow (NYSE: NOW) is expected to increase its revenue and earnings by 22% and 23%, respectively, in 2024. Analysts expect the cloud-based customer relationship management (CRM) company HubSpot (NYSE: HUBS) to grow its revenue and earnings by 21% and 22%, respectively, next year.

Yet Palantir is still more richly valued than those higher-growth companies. It trades at 75 times forward earnings, while ServiceNow and HubSpot have lower forward multiples of 47 and 65, respectively. Palantir is also still trading nearly 80% above its debut price of $10 upon its direct listing three years ago.

Is it too late to buy Palantir?

I believe too many investors still see Palantir as a meme stock -- as they did when they feverishly bid its stock price to an all-time high of $39 per share in January of 2021 -- instead of a long-term investment. So even though Palantir's core business is improving, I think it's too late to chase its recent post-earnings rally. It might be worth buying again at a lower valuation, but I wouldn't want to pay the wrong price for the right company in this unforgiving market.