Is Palantir a buy after its recent solid earnings performance?

Palantir (PLTR 0.68%) the stock has been on fire lately.

Since the company reported its 2024 second-quarter results last week, the stock is up 25% as of this writing, thanks to its solid 27% top-line growth. The company also raised its guidance for the full year, suggesting that the current momentum will continue.

Current shareholders are rightly delighted with the stock’s performance. But for those who haven’t bought stock yet, is now a good time to enjoy Palantir’s solid performance?

Image source: Getty Images.

Palantir reported another quarter of solid performance

Palantir went public in 2020 during the COVID-19 pandemic, when digital services were in high demand. That year, it reported a staggering 47% revenue growth rate. But since then, revenue growth has slowed for many quarters — hitting a low of just 13% in the second quarter of 2023 — before picking up again to over 20% by the end of 2023. So investors don’t they were unsure whether the recent increase in the rate of income growth would be sustainable.

Palantir’s latest result allays those concerns, with accelerated 27% revenue growth to $678 million. Not only that, adjusted operating margin also hit a new milestone of 37% as operating leverage kicked in. The company also reported GAAP net income of $134 million, up from $28 million a year earlier.

Beyond the solid financial performance, operational metrics also came in strong. For example, Palantir closed 123 US commercial deals, up 98% year over year. The number of commercial customers in the US also increased by 83% year-over-year, contributing to a 55% increase in commercial revenue. The huge growth in commercial revenue suggests that the technology company’s diversification into the commercial sector is gaining momentum.

In short, Palantir is firing on all cylinders, and its strong performance could continue for many years, riding on tailwinds like artificial intelligence (AI).

There is a massive opportunity in artificial intelligence

One of the biggest trends in recent years is the proliferation of the use of AI in corporations and in our daily lives. In particular, the rise of generative AI (and services like ChatGPT) demonstrate to even the unsophisticated user how AI could change our lives.

While a lot of attention has been focused on some huge companies like Nvidia, Microsoftand Alphabetsmaller but narrower AI software-focused companies like Palantir have also been a direct beneficiary of this trend. In particular, Palantir’s experience in providing public sector software platforms to harness the power of unstructured data gives it an edge in this AI race.

Moreover, as companies rush to implement the latest AI technologies to avoid losing out to competitors, they prefer to work with companies with a proven track record rather than another would-be start-up. Not surprisingly, many companies reached out to Palantir, with over 1,025 companies completing their AIP Bootcamp. This bootcamp was massively successful for Palantir, leading to deals worth up to seven figures.

Huge corporate interest in AI technology accelerated US commercial customer growth last quarter by 83% to 295. For perspective, that number was just 14 in the same quarter of 2020. While impressive, Palantir likely just scratched the surface the area of ​​enormous opportunity going forward, given that the AI ​​market is expected to reach $826 billion in 2030.

Palantir can sell its AI services to existing customers, convert the 1,025 organizations that have completed the AIP Bootcamp, and recruit new customers for future bootcamps. It could also continue to develop its AI tool suite over time as AI technologies advance. For example, it may consider launching consumer catering services, further diversifying its business.

In short, the sky seems to be the limit!

Investors are understandably in a euphoric mood

With so many opportunities in front of Palantir, it’s no surprise that investors are incredibly bullish on the stock’s upside potential.

Palantir trades at a price-to-sales (P/S) ratio of 31, more than four times Alphabet’s P/S ratio of 6.5. And therein lies the problem. A company with great prospects is not necessarily a great investment. Investors also need to buy the stock at a reasonable price to get downside protection and a solid return potential.

Unfortunately, Palantir stock offers no such prospect for investors. On the contrary, its skyrocketing valuation means the company needs to execute impeccably or risk getting its valuation reassessed.

In other words, the stock is, at best, a high-risk, high-return bet.

What it means for investors

Palantir is riding a mega-wind that could last for years, if not decades. However, the stock is overpriced, making it too risky for new investors to enter now.

So, except for those with a huge appetite for risk, most investors should keep Palantir on their watch list for now.