Palantir Technologies (PLTR 3.73%) has been a battleground stock since it went public in September 2020. Spurred by improving profitability and enthusiasm for its artificial intelligence (AI) initiatives, the company's share price has soared 141% over the last year. On the other hand, the stock is still down 57% from the high it reached shortly after its initial public offering.
Is Palantir a worthwhile investment that leaves room for strong returns at today's prices? Or is it too richly valued to be a smart buy right now? Read on to see competing bullish and bearish takes from two Fool.com contributors on this hotly contested growth stock.
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Bull: Palantir's business keeps getting stronger
Keith Noonan: There's no doubt that Palantir stock has an above-average risk profile. On the other hand, shares also come with the potential to deliver explosive returns, and there's a lot to like about the business's recent progress.
For starters, Palantir's AI business seems to be ramping up nicely. In May the company launched its Artificial Intelligence Platform (AIP) software suite. By August, the new service had onboarded over 100 customers. When the company published its third-quarter results at the beginning of November, management announced that AIP was being used by nearly 300 organizations.
Palantir got its start providing software and analytics to the U.S. government for counterterrorism initiatives and still derived roughly 55% of its revenue from government customers in Q3. However, the data specialist is rapidly building the size of its business in the private sector as well. AIP and other services will power continued growth.
Total revenue from commercial customers grew 23% year over year in the third quarter. Meanwhile, sales to government customers grew 12%. Combined performance from these two segments pushed overall revenue up 17% year over year to $558 million.
Sales to private sector customers are growing at a much faster rate and will soon come to account for the majority of overall sales. In turn, this should help the company's overall rate of sales growth continue to accelerate.
Beyond growth tailwinds from AI services and a shifting composition of sales, Palantir is also heading in the right direction when it comes to margins and profitability. In the third quarter, the business posted a gross margin of roughly 80.7% -- up from a margin of 77.5% in the prior-year period. With net income of roughly $72 million, the company delivered its fourth straight quarter of profits and an encouraging 13% net income margin.
Charting Palantir's long-term outlook still involves a substantial degree of speculation, but the company's competitive strengths and business momentum make the stock a worthwhile buy for growth-focused investors.
Bear: Palantir stock is too expensive
Parkev Tatevosian: My bear case for Palantir stock centers on its valuation. Palantir is trading at a price-to-earnings ratio of 279. That's a very high price for a company experiencing decelerating revenue growth. Admittedly, Palantir is on the cutting edge of AI, offering enterprises and institutions AI solutions that enhance their operations.
PLTR PE Ratio data by YCharts
Still, if Palantir's services were that firmly in demand, wouldn't revenue growth be accelerating, not decelerating? Notably, Palantir's annual revenue growth rate has decreased from 47% in 2020 to 41% in 2021 and 24% in 2022. To make matters worse, when the company reports final results for 2023, the revenue growth rate is likely to be even lower. These are not exactly the excellent prospects you would expect while paying a massive premium valuation for Palantir stock.
The company has made excellent progress on profitability, with 2023 expected to be the first full year of net profitability (non-GAAP). But that's not enough to entice me to pay the expensive valuation.
At lower prices, I am willing to overlook some undesirable business characteristics. This is similar to how I may be willing to buy a jacket that has great features and fit but is not my desired color if the price is low. However, at a premium price, I want everything to be how I want it. The color, the size, the fit. That's the case here with Palantir. It is a solid business at the forefront of developing AI services and improving profitability. However, the decelerating revenue growth is enough to keep me away at current valuations.
Palantir is a high-risk, high-reward stock
Palantir is recording encouraging momentum on some fronts and has exciting opportunities ahead, but its outlook remains highly speculative. Because of its growth-dependent valuation and elevated risk profile, the stock won't be a good portfolio fit for some investors. On the other hand, Palantir stock could wind up delivering market-crushing returns for investors if the company continues to strengthen its advantages in AI and maintains its upward earnings trajectory.
