Palantir Technologies (PLTR 0.97%) captivated investors like few other stocks in recent years.
The deep data analytics stock unlocked a new level of growth and utility with its artificial intelligence platform (AIP), and that has helped drive accelerating revenue growth over the last seven quarters. The stock has jumped 1,200% over the last three years.
It's been a remarkable run for Palantir, but can the stock deliver more gains from here? Let's take a look at where Palantir stands today, and whether or not the stock is a buy.
Image source: Getty Images.
Palantir's momentum keeps building
Palantir got its start more than 20 years ago, developing software to help counterterrorism agencies connect disparate data points, break silos, and gain insights they wouldn't have found without it.
That model of mining data to deliver actionable intelligence proved to be useful for commercial businesses as well, and Palantir, which has limited direct competition, is delivering strong growth in both of those segments.
In the first quarter, U.S. revenue grew 55% to $628 million with U.S. commercial revenue up 71% to $255 million and U.S. government revenue up 45% to $373 million. Overall revenue growth was up 39% to $884 million.
Palantir also raised its guidance for the full year. It now expects revenue growth of 36% for the year and U.S. commercial revenue growth of 68%.
The U.S. commercial business, which represents a much larger addressable market than the U.S. government, is clearly on fire with booked total contract value up 183% in the quarter to $810 million.
Palantir's profits are also soaring with operating income more than doubling in the quarter to $176 million.
The valuation question
It's hard to find fault in Palantir's business at the moment. Revenue growth is accelerating. Profit margins are expanding, and the business appears to have a long runway in the U.S. commercial segment, especially as demand for AI utility grows.
However, no stock analysis is complete without considering the valuation, and Palantir is a unique case as its valuation reached stratospheric levels.
The stock currently trades at a price-to-sales ratio of 96, a level pretty rarely seen in a company of this size. Palantir is expensive enough that most investors would still consider it to be expensive even at a P/S ratio of 24, about a quarter of what it is now. In order to reach that valuation at the current stock price, the company would have to grow its revenue by 4 times. Even if it grew its revenue by 40% every year, it would still take four years to grow into that valuation, and that assumes no appreciation in the share price.
It's unclear what Palantir's addressable market is, but the size of the business is still modest compared to the attention it's gotten from investors, as well as the valuation.
Is Palantir a buy?
Palantir's momentum is clearly impressive, and the business is firing on all cylinders.
However, at the current valuation, the stock seems priced for several years of perfection that will be hard to deliver given the uncertainty in the economy, the potential for new competition, and other factors.
At the current price, investors are better off waiting for a better buying opportunity with Palantir. While the business seems poised to deliver more strong growth over the rest of the year, the stock is vulnerable to a sharp pullback. Buying on a dip seems like a better move here, though investors will have to be patient in getting one, given the hype around the stock.
