When investors think controversial stocks, Palantir Technologies (PLTR +2.53%) likely heads the list. While bulls focus on the company's accelerating growth, bears cite Palantir's frothy valuation. Yet for high-growth stocks such as this, both sides can be right, and neither truth exists in a vacuum.
Both camps had staked out their positions heading into Palantir's quarterly report, with bulls and bears alike eagerly anticipating the news. The results sailed past expectations, providing undeniable evidence that artificial intelligence (AI) still has room to run.
Image source: The Motley Fool.
Blockbuster results
There was a lot riding on Palantir's first-quarter financial report, and the data mining and AI specialist delivered all that and more. Revenue of $1.63 billion rose 85% year-over-year -- marking the company's highest ever year over year growth rate, while also rising 16% quarter-over-quarter. This fueled adjusted earnings per share (EPS) of $0.33, which surged 154%.
For context, analysts' consensus estimates called for revenue of $1.54 billion and adjusted EPS of $0.28, so Palantir cleared both hurdles with room to spare.
Palantir's U.S. commercial segment, which includes its flagship Artificial Intelligence Platform (AIP), took top billing. Revenue for the segment accelerated to $595 million, surging 133% year over year and 18% sequentially and accounting for 36% of total revenue. Growth in the U.S. government segment did its part, rising 84% year over year and 21% quarter over quarter to $687 million.
The company closed total contract value (TCV) of $2.41 billion during the quarter, up 61% year over year. Of that, the U.S. commercial segment reported TCV of $1.17 billion, up 45%.
Palantir's future continues to look bright. The U.S. commercial segment delivered remaining deal value (RDV) -- or the value of the agreements that haven't been fulfilled -- that surged 112% year over year and 12% quarter over quarter to $4.92 billion. This shows that the company is building a solid foundation for the future.
NASDAQ: PLTR
Key Data Points
Other metrics are equally bullish. The company's Rule of 40 score, which helps assess the quality of earnings, rose to 145% -- when any number above 40% is a sign of financial strength. Palantir also delivered operating cash flow of $899 million, with a 55% margin, and adjusted free cash flow of $925 million, with a 57% margin.
Palantir's financial position continued to improve, with cash and equivalents totaling $8 billion.
Finally, management increased its full-year revenue guidance to 71% growth, up from its 61% forecast issued just last quarter, with the U.S. commercial segment expected to growth 120%.
What it means for investors
This is incredible news for Palantir investors, silencing the doubters who insist the company's growth has peaked.
The stock's valuation understandably represents a stumbling block for some investors. Indeed, Palantir is selling for 232 times earnings, but the most commonly used valuation metrics often fall short when measuring high-growth stocks.
Using the more appropriate price/earnings-to-growth (PEG) ratio -- which factors in the company's phenomenal growth rate -- returns a multiple of 0.99, when any number less than 1 signals an undervalued stock. Furthermore, the company just delivered its 11th consecutive quarter of accelerating revenue growth, with no end in sight.
To be clear, Palantir will remain a battleground stock, and growth of this magnitude is often accompanied by significant volatility. Moreover, any failure by the company -- real or imagined -- to meet investors' lofty expectations will likely be met by a swift and severe rerating.
For investors who fear they've missed the boat, take heart. Buying a small position as part of a balanced portfolio is one way to ride this train. Gradually dollar-cost averaging into a position is another.
Palantir has shown its mettle in helping enterprises and governments participate in the AI revolution. Given its ongoing success, I would submit that Palantir stock is a buy.
