Palantir Technologies (PLTR 3.73%) has been a popular stock with growth investors in the past year. The data analytics company helps both government and commercial customers make better decisions through the use of its platform. And last year, the company launched an artificial intelligence (AI) platform, which can improve and expedite the decision-making process for its customers even further.
Already a trusted partner with many government organizations, the company recently landed another deal that will help boost its top line. Does this deal make Palantir a no-brainer buy, even despite its already strong 43% gains this year?
Palantir secures a large military contract with the Army
On March 6, Palantir announced it had won a contract with the Army. The deal is worth $178.4 million and involves the development of the Army's Tactical Intelligence Targeting Access Node (Titan), which utilizes AI and machine learning. Titan's goal is, "to provide actionable targeting information for enhanced mission command and long range precision fires."
For Palantir, the big takeaway is not just the financial payout from the deal but, perhaps more importantly, the proof that its AI platform is winning over customers. In the press release announcing the deal, Palantir says this is the first "AI-defined vehicle" for the Army.
Government revenue accounts for a big slice of Palantir's top line, and this could offer proof to investors that there's still plenty of growth potential in that area of its business as well when it comes to AI.
Palantir's growth from the government has been underwhelming
One concern for investors is that while Palantir has been growing, its growth rate may not be significant enough. In the fourth quarter of 2023, which was for the last three months of the year, the company's revenue grew 20% year over year to $608 million. But government revenue was only up by 11%. And on a quarter-over-quarter basis, it only rose by 5% to $324 million.
Flashback to a year earlier, and Palantir's growth rate was much more impressive on the government side. While total revenue only rose by 18%, government-related contracts were driving much of the growth rather than slowing it down; a year ago, government revenue was rising at a rate of 23%.
The Titan contract is expected to add $89 million to Palantir's revenue this year and should improve the company's growth rate in its government segment.
Palantir's commercial businesses, meanwhile, has been growing at a much faster rate. Last quarter, its sales totaled $284 million and rose by 32% year over year, and it was up 13% on a quarter-over-quarter basis. The company has seen strong demand for its AI platform from businesses and that has been leading to a surge in revenue on the commercial side. If this impressive pace continues, it may only be a matter of time before the commercial business generates the majority of revenue for the company.
Does this deal make Palantir a hot buy?
Palantir reaching a deal with the Army on a new AI-powered deal is great news for the business. But given the stock's expensive valuation, investors have arguably already been paying for that growth. At 27 times revenue and nearly 80 times expected future earnings, the stock comes priced at a huge premium. Continued growth and deals are why investors have been bullish on Palantir's stock, to begin with, and that is a key reason its price remains as high as it is.
This new deal did help give the stock a boost but it's not significant enough of a development to suggest this will be a catalyst that helps Palantir's stock soar higher. Palantir does have a lot of long-term potential but its growth rate may not be high enough to justify its steep valuation. At such a high price, investors may be better off pursuing other growth stocks instead.
