Is Palantir Stock a Buy?

Palantir Technologies' (PLTR 3.73%) stock skyrocketed 31% on Feb. 6 after the company released its fourth-quarter earnings report. The analytics software specialist's revenue rose 20% year over year to $608 million and exceeded analysts' estimates by $6 million. Its adjusted net income surged 98% to $190 million, or $0.08 per share, and matched the consensus forecast.

Those headline numbers looked healthy, but Palantir's stock remains 44% below its all-time high from January 2021. Is it finally safe to bet on a longer-term turnaround?

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Revenue growth is accelerating again

Palantir operates two data mining platforms: Gotham for its government customers and Foundry for its commercial clients. Both platforms gather information from disparate sources to help their organizations make faster data-driven decisions.

During the fourth quarter, Palantir generated 53% of its revenue from its government customers, while the remaining 47% came from its commercial clients. Here's how those two core businesses fared over the past year.

Data source: Palantir. YOY = year over year.

Gotham's growth continued to cool off as it grappled with the uneven timing of its government contracts, but Foundry weathered the macro headwinds in the commercial sector and once again expanded at a faster rate. Its commercial acceleration offset the deceleration of its government business, and its total revenue growth sped up for the second quarter straight.

Palantir attributed Foundry's rapid expansion to the booming U.S. market. Its U.S. commercial revenue surged 70% year over year in the fourth quarter, accelerating from its 33% growth in Q3 and 20% in Q2. Its total number of U.S. commercial customers rose 55% year over year to 221, while the cohort's total contract value (TCV) surged 107% to $343 million. Its rollout of new AI-powered tools over the past year likely contributed to that growth spurt.

That commercial expansion suggests that Palantir can successfully leverage the battle-hardened reputation of its government business to lock in big enterprise clients. It also indicates that Palantir can compete effectively against other enterprise-oriented companies like Alteryx and Salesforce in the crowded cloud-based analytics market.

But investors shouldn't expect Palantir's revenue growth to significantly accelerate throughout 2024. For the first quarter, revenue is projected to rise 17% year over year, which is slightly below analysts' expectations for an 18% increase.

For the full year, management sees revenue rising 18%-20%, which would represent a slight acceleration from the company's 17% growth in 2023 and likely exceed the consensus forecast for an 18% increase. Those growth rates seem robust, but they're well below its original outlook for at least 30% revenue growth through 2025.

Margins are rising and profits are soaring

On the bright side, Palantir's margins continue to expand as it reins in its spending. Its adjusted operating margin rose from 22% in 2022 to 28% in 2023, and the company expects it to climb to a midpoint of 32% in 2024. Palantir's adjusted free cash flow (FCF) margin tripled from 11% in 2022 to 33% in 2023, and management projects it will reach a midpoint of 34% in 2024.

But more importantly, Palantir remained profitable on a generally accepted accounting principles (GAAP) basis for five consecutive quarters as it reduced its stock-based compensation expenses. It expects to remain profitable on a GAAP basis throughout all four quarters of 2024, which arguably makes it more appealing than other cloud software companies that are only profitable based on non-GAAP measures. Palantir didn't offer any exact estimates for its bottom line, but analysts expect its adjusted earnings per share (EPS) to rise 16% for the full year.

But the stock still looks pricey relative to its growth

Palantir is still growing, but its stock isn't cheap at 63 times forward earnings and 18 times its 2024 sales. Alteryx is expanding more slowly than Palantir, but it trades at just 38 times forward earnings and 3 times next year's sales. Salesforce is also a lower-growth tech giant, but it only trades at 30 times forward earnings and 7 times next year's sales.

Those comparisons suggest that there's still too much growth and AI hype priced into Palantir's stock -- and it could be overvalued after its post-earnings pop. Therefore, I don't think it's the right time to buy Palantir. The company's growth is stabilizing and its margins are expanding, but it could struggle to justify its premium valuations over the next 12 months.