Palantir Technologies (PLTR +2.52%) has been one of the market's hottest stocks this year, with its price more than doubling. However, it is also one of the more divisive names in the market, largely due to its valuation.
Let's take a look at both the bull and bear cases with Palantir to help determine whether the stock is a buy at current levels.
NASDAQ: PLTR
Key Data Points
The bull case
Palantir has established itself as one of the top data gathering and analytics companies in the world. The U.S. government has used the company's technology for such mission critical tasks as fighting terrorism and tracking the spread of COVID-19. As a result, the company's resume is undeniable.
More recently, the company has created an artificial intelligence platform (called AIP) that is expanding its use cases and making the company's services more desirable to commercial clients. AIP lets users build AI apps, actions, and agents in a workflow builder to help solve complex problems across industries.
The new offering has been resonating with commercial clients, as seen in its recent results. Its commercial segment revenue jumped 33% year over year in the second quarter to $307 million, while its U.S. commercial revenue surged 55% to $159 million.
The company is implementing a go-to-market strategy of using boot camps to attract new customers to its AIP offering. Through these boot camps, Palantir provides training and onboarding to demonstrate to customers how they can use AIP. This is helping greatly increase the company's customer count, with U.S. commercial customers surging 83% year over year and 13% sequentially to 295 customers.
The company sees its next big growth driver as taking these new customer wins and moving them from prototype work into production. This is a classic land-and-expand strategy and it is still in its early days. The company showed solid net dollar retention of 114% last quarter. This is a metric that measures growth of existing customers after any churn over the past year. However, Palantir noted that this metric does not take into account the momentum it is seeing in customers acquired in the past 12 months.
At the same time, revenue growth from its largest client, the U.S. government, is starting to reaccelerate after a lull. In its most recent quarter, U.S. government revenue climbed to 23%, up from 14% overall government growth in 2023.
The company has also announced a number of government contract wins this year, including a five-year nearly $100 million deal to expand its Maven Smart System access across the military and an initial $153 million production contract to make licenses of its AI-enabled operating system available across the Department of Defense. Palantir also recently announced it is teaming up with Microsoft to deploy its services over Microsoft's government and classified cloud environments to try to speed up the process of implementing AIP offerings within the government vertical.
Altogether, Palantir appears to have a lot of growth opportunities in front of it.
Image source: Getty Images.
The bear case
The bear case for Palantir largely stems from its valuation, as the fervor around the stock has driven it to lofty valuations, with the stock trading at a forward price-to-sales (P/S) multiple of 30 based on current-year analyst estimates. That type of P/S multiple just does not match with the 27% revenue growth the company saw last quarter or the 17% revenue growth it generated in 2023.
Prior to the pandemic, high-gross-margin software-as-a-service (SaaS) companies with growth generally between 25% to 35% would typically trade at an enterprise value-to-revenue ratio of under 10. Palantir is currently trading at a 29 multiple based on current-year analyst estimates for revenue of $2.76 billion and 24 times 2025 analyst revenue estimates of $3.32 billion.
That's not just a little overvalued, that is an extraordinary valuation given its current growth rate. While a huge acceleration in growth could help justify its valuation, it is worth remembering that it appears Palantir's government business growth can be a bit lumpy. Analysts, meanwhile, are only projecting about 20% revenue growth in 2025.
At the same time, insiders have also been looking to dump Palantir shares. The company's chairman, Peter Thiel, recently adopted a Rule 10b5-1 plan to sell nearly 28.6 million Palantir shares by the end of 2025. Meanwhile, Palantir CEO Alex Karp exercised and sold 9 million shares of options at an exercise price of $11.38 that were not set to expire until 2032 through a Rule 10b5-1 plan. It was a big increase from the 575,000 shares he sold as part of the plan in August, indicating there may have been a pre-set trigger price to accelerate his selling.
Meanwhile, other executives including its CFO, and multiple directors have also been selling shares.
While Palantir the company has a bright future ahead, price still matters and Palantir's stock is trading at extreme levels. As such, I'd follow the lead of the company's top executives and be a seller of the stock, not a buyer.
