Undoubtedly, Palantir Technologies' (PLTR 1.44%) stock performance is starting to cool off a bit. The stock was the biggest gainer in the S&P 500 last year, rising by an incredible 340%. But now there are serious concerns about its lofty valuation, and the federal government shutdown -- which as of this writing shows no sign of ending -- could also cause issues for the company.
Palantir stock is still beating the market, up 33% in the last three months and up about 136% year to date. With its third-quarter earnings report about a month away, is Palantir stock still a buy right now?
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What Palantir does
There's no other company quite like Palantir. It was created two decades ago, as management puts it, as an answer to technology platforms that weren't adaptive enough to handle complex issues and took too long to deploy as custom systems.
Palantir is a data-mining company that uses artificial intelligence to gather and analyze information from thousands of sources. For instance, military and intelligence agencies can get insights about adversaries by tapping into satellites around the world, giving them insights and the ability to make decisions using real-time data in battlefield situations.
Palantir has been working with the U.S. government for a long time, and is famously credited for providing the intelligence that led to the killing of Osama bin Laden.
In 2022, it rolled out its Artificial Intelligence Platform (AIP), which allows both military and commercial clients to utilize large language models to interact with data and operations. The platform uses AI and the company's data to suggest process improvements, offers guidance on how to accomplish tasks, and interacts with AI systems to perform tasks.
Palantir uses what it calls boot camps to give prospective customers a chance to see how the platform works on their real-world problems and how it could change their operations. That strategy has been incredibly successful: Palantir closed 157 deals in the second quarter that were valued at more than $1 million each; 66 valued at more than $5 million; and 42 deals valued at more than $10 million each. The company generated $306 million in the second quarter from its fast-growing U.S. commercial segment (up 93% from a year ago). And its U.S. government revenue continued to grow as well, up 53% from a year earlier to $426 million.
Looking ahead to Q3 earnings
The question that Palantir's next earnings report will answer is whether or not it duplicated or exceeded the growth it achieved in Q2 in Q3 -- because the expectations for the company are sky-high.
Palantir currently trades at eye-watering valuations: Its price-to-earnings ratio is 623, its forward P/E is 217, and its price-to-sales ratio is 137. There are no numbers that it can post in the third quarter to make those ratios reasonable because the stock trades on momentum and expectations, not on the company's current fundamentals. To invest in Palantir requires that you believe in the potential and the growth story, and that you not worry as much about the math.
However, people will be much more nervous about Palantir if it doesn't post blowout quarterly results. According to Yahoo! Finance, the consensus among analysts following the stock is that Q3 revenue will come in at $1.08 billion. That would be up 50% on a year-over-year basis, but only an 8% increase on a sequential basis. I don't think that would be enough to sustain Palantir's stock run.
Management's guidance matches the Street's expectations. For the full year, the company is looking for revenue between $4.142 billion and $4.150 billion, which would be about 44% better than 2024. Again, those are great numbers, but would they be enough to satisfy the sky-high expectations of institutional investors? I am skeptical.
The bottom line
Palantir is a good company. It has a product that other companies can't match, its commercial segment is growing rapidly, and its mission to create AI agents that can perform basic job functions dovetails well with the desire of President Donald Trump to shrink the federal government's workforce.
But the stock is still reeling from an August report from short-seller Citron Research that called Palantir's valuation "detached from fundamentals" and assigned it a price target of $40 per share, which is roughly 73% lower than today's price. While I think that's overstating the issue, I agree that any argument about Palantir that rests on valuation is a losing argument for the stock.
In my opinion, Palantir must exceed expectations in its third-quarter report to keep its run going. The stock's rise is already slowing, and any sign of weakness could feed into Citron's warnings. I think Palantir's still a buy, but investors should approach the next earnings report with caution.
