Palantir (PLTR 0.22%) came into its fourth-quarter earnings report with its shares priced to perfection, but the AI stock lived up to the markets' expectations.
Shares jumped as high as 28% on Feb. 4 after the company smashed expectations, showing that its momentum continues to build. Revenue growth accelerated again, coming in at 36% to $828 million, which easily beat the analyst consensus at $781 million.
That was driven once again by Palantir's home market. U.S. revenue rose 52% to $558 million, with commercial revenue up 64% and government revenue up 45%.
CEO Alex Karp noted that growth in Europe was disappointing as revenue increased just 4%. Management noted in the earnings call that European clients still seem hesitant to embrace the new technology.
Nonetheless, the U.S. business is clearly strong enough to drive the overall company, and bottom-line results beat expectations as well. Adjusted operating income improved to $373 million, up from $209 million a year ago, and adjusted earnings per share rose from $0.08 to $0.14, ahead of the consensus at $0.11 per share.
Palantir's other metrics showed that its AI platform (AIP) is continuing to drive growth and separate it from the competition. Its U.S. commercial remaining deal value, a proxy for its business backlog, jumped 99% to $1.79 billion, and U.S. commercial total contract value jumped 134% to $803 million.
Palantir still counts the U.S. government as its largest single segment, but the commercial market represents an even larger addressable market, and those numbers bode well for future growth.
Image source: Getty Images.
Why Palantir is on fire
Palantir's take on AI has long been that the large language models (LLMs) that power ChatGPT and other chatbots will become commodities, so what counts is the software that's built on those models, such as its AIP.
On the call, management said the DeepSeek release has led that thinking to become the industry consensus, and its investments in infrastructure and what it calls "Ontology" have given it a competitive advantage in creating productive AI services. Palantir describes its Ontology as a "digital twin of the organization" that bridges the company's AI platform and a client's business.
Chief Technology Officer Shyam Sankar explained during the call:
[W]e viewed LLMs as a new runtime for the AI labor. To capture the productive value of this AI labor, you need an intermediate representation of your enterprise that AI can actually interact with. How do you allocate inventory, onboard customers, process claims, call for prior authorization, and the like? That intermediary representation that makes all of that possible is Ontology, and that's why it's been the secret to our meteoric rise.
In addition to its technological advantages, which are driving rapid growth and adoption, the company is also realizing scale advantages. Speaking to that and the power of the technology, Karp said:
We do not need 500 extra people a quarter. We just -- we can really power these things because the pull, when people actually see it, is enough to break down the institutional barriers, the political [expletive] that often we were not able to break through in the past.
NASDAQ: PLTR
Key Data Points
Can Palantir keep going higher?
At this point, it's hard to doubt the strength of Palantir's business, and its guidance showed its momentum is expected to continue through 2025. The company called for revenue of $3.741 billion to $3.757 billion for the full year, representing 31% growth, an acceleration from 27% in 2024, and it sees similar growth in adjusted operating income to a range of $1.551 billion to $1.567 billion.
However, the question for investors has always been around the company's valuation, which is now even higher. Following the post-earnings surge, Palantir trades at a price-to-sales ratio of 89, and a price-to-earnings ratio near 550.
On a forward-looking basis, those multiples fall to 63 and 188, respectively, so it appears Palantir could eventually grow into its valuation assuming it sustains its current momentum. But those valuations also set investors up for a lot of downside risk if it misses expectations, and things can change quickly in an emerging industry like AI.
Palantir deserves credit for its remarkable rally, but the valuation is likely to put the brakes on this growth stock in the near term.
