Palantir just won another big contract. Is it enough to make the stock a buy?

Palantir Technologies (PLTR 0.60%) continues to collect new contracts. The latest is an agreement with the US government to bring artificial intelligence (AI) capabilities to various military branches through its Maven intelligent system. The deal will pay Palantir up to $99.8 million over the next five years.

While the company has announced several new contract wins, many investors question whether these contract awards will be enough to fuel the growth necessary to justify the company’s high valuation. Let’s see if an answer presents itself.

Valuation versus growth

Palantir has established itself as a leading data analytics and AI technology company that helps the government with some of its most critical tasks. Its services have been used to fight terrorism and track cases of COVID-19 during the pandemic. More recently, it has seen significant growth in the private sector as customers adopt its Artificial Intelligence Platform (AIP) to address their various use cases.

Palantir’s success in the private sector extends across industries. Its recent contracts include work for health system Nebraska Medicine and the energy giant BP. The company is gaining a lot of traction with commercial customers for its AI platform, with its commercial segment posting a 33% year-over-year revenue increase in the second quarter to $307 million.

Its general government segment has shown signs of slowing in growth in the past only 14% in 2023. But it’s growing this year, with 16% growth in Q1 accelerating to 23% year-over-year growth in Q2 to reach $371 million for the quarter. Meanwhile, growth in its US government segment went from just 12% year-over-year in Q1 to 24% in Q2. Overall, Palantir reports solid growth that is accelerating, with total Q2 revenue growth reaching 27% to $678 million.

When it comes to the stock, the company’s revenue growth still doesn’t do much to justify its current valuation. Its forward price-to-sales (P/S) ratio is 25 times analysts’ consensus 2025 earnings estimates.

PLTR PS report data (1 year ago) by YCharts

This is the kind of valuation that is typically reserved for hyper-growth stocks that expect earnings growth of 50% or more over the next few years. Palantir needs to see growth continue to accelerate if it wants to justify its current stock valuation.

A deal like the one it just signed with the military for its Maven smart system will add about $20 million a year in revenue. The company had estimated revenue between $2.742 billion and $2.750 billion this year, so $20 million doesn’t move the needle much, adding about 0.7 percentage points of growth.

That’s a big deal, but the company will need a lot more big US government contracts to really help accelerate growth. One way they could do this is to team up with Microsoftas it will now be able to deploy its offerings through Microsoft’s government cloud, including Microsoft Azure Government, Azure Government Secret and Azure Top Secret cloud. The government isn’t known for making the fastest decisions, and Palantir hopes this partnership will help it speed up implementations with the US government, particularly with AIP.

Commercially, the company will continue to look to grow its customer base through the use of bootcamps, which show customers how AIP can be applied to potential use cases, while providing onboarding and training. The company won many customers for prototype work with this go-to-market strategy, which it then moved to production.

This transition from prototype to production is where Palantir sees its biggest opportunity, and the company has done a great job of growing business with existing commercial customers.

Image source: Getty Images.

Rating still matters

The problem, however, comes down to valuation. If Palantir were able to grow revenue by 30% in each of the next three years (a rate higher than its current revenue growth), it would result in $6 billion in revenue in 2027. This total revenue would result in a P /S anticipated. multiple of about 14 using the current share price.

With 30% revenue growth, that 14 P/S could be justified and would be similar to a company like CrowdStrike. However, it would also mean that Palantir stock traded flat for the next two years. It’s also asking a lot to see the company generate revenue growth of 30% per year over the next three years, when it generated 24% revenue growth in 2022, 17% revenue growth in 2023 and 24% in the first six months of the year. this year.

While Palantir has the makings of a great company, valuation still matters, and Palantir’s valuation is too high to justify buying right now.