Palantir Technologies (PLTR +4.75%) recently announced mind-blowing earnings results, from double-digit revenue growth across businesses to record deal values as well as numbers of deals. The software company has built its business over more than 20 years, but in recent times, Palantir's strength in applying artificial intelligence (AI) to real-world problems has helped demand explode higher.
Both government and commercial customers have flocked to Palantir's Artificial Intelligence Platform (AIP), a system that puts AI to work on the customer's data to aggregate and make the best use of it. The results can be game changing, leading to better decisions, new strategies, and completely different ways of organizing how business is done.
In the fourth-quarter report, good news seemed to flow from every angle -- but one number in particular, a number that's often overlooked, really gives us reason to cheer. That's because this particular number shows the company is hitting it out of the park when it comes to balancing growth and profitability. And that bodes well for long-term earnings and share price performance.
Let's meet this one number from Palantir that could keep this supercharged stock soaring.
Image source: Getty Images.
Harnessing the power of data
So, first a little background on Palantir and its path so far. Palantir, as mentioned, offers a software platform that helps customers harness the power of their own data and apply it to improve operations. The company was originally most associated with government contracts, but as demand for AI picked up, more and more commercial customers started to check out Palantir's AIP.
The result has been tremendous growth. Just four years ago, Palantir had 14 U.S. commercial customers. Today, that number has reached 382. On top of that, in the recent quarter, Palantir closed a record $803 million of U.S. commercial total contract value -- that represents a 134% increase year over year.
How are commercial customers using Palantir's AIP? A great example is Rio Tinto. The mining and metals giant recently extended its work with Palantir for another four years because AIP is offering the company a chance to access its unstructured data and tackle problems that before seemed out of reach.
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Key Data Points
All this has helped Palantir increase revenue and profit, even reaching its highest quarterly profit ever in the third quarter of the year. But it's one particular number, in the fourth-quarter earnings report, that stands out and could keep the good times rolling for Palantir.
I'm talking about Palantir's "Rule of 40" score. The Rule of 40 is a financial metric applied to software-as-a-service (SaaS) companies to evaluate how well they're balancing growth with profitability. This number should be 40% or higher in order to be considered a solid SaaS company. So the idea is if a company is at or above this level, it's not only growing, but it's turning that growth into profit too -- so you've got the best of both worlds.
A score of 81%
In the recent quarter, Palantir's Rule of 40 score reached an eye-popping 81%. During the earnings call, chief executive officer Alex Karp said he considered that one of the company's greatest numbers of the period.
To put the accomplishment into perspective, we can take a look at 2021 research from McKinsey & Co. that found that hardly one-third of software companies reach the Rule of 40, and fewer are able to maintain it. In fact, the research showed companies only surpassed the rule 16% of the time.
So, it's clear that Palantir, which has greatly exceeded the rule every quarter last year, and in particularly in the recent quarter, truly stands out from the crowd.
Now let's get back to my point about stock performance. The shares already climbed 340% last year, but there's still plenty of room to run, considering how Palantir is managing growth and profit. Palantir's ability to top the Rule of 40 shows this company is expertly balancing the two. And the fact that it's topping the Rule of 40 by so much suggests this is sustainable, too, as it's well beyond that minimum level -- this offers some wiggle room during quarters that may be more difficult.
So, Palantir's Rule of 40 accomplishment is something investors shouldn't ignore. This one particular number highlights the company's ability to keep delivering solid earnings -- and that could keep this top stock roaring higher.
