Is Palantir's AI Edge Enough to Justify Its Price?

Key Points

• Palantir's Q3 earnings demonstrate strong growth, driven by increasing demand for AI-powered solutions.
• Palantir's strategic partnership with Anthropic and AWS bolsters its AI capabilities, particularly in the government sector.
• While Palantir's valuation is high, its dominant position in the AI software market and strong unit economics justify investor interest but warrant careful consideration of risks.

Palantir Technologies NYSE: PLTR has been one of the hottest stocks of 2024. Palantir’s stock price has soared about 240% year-to-date and 195% for the full year. The company is known for providing artificial intelligence (AI) powered software platforms to government and commercial customers.

Palantir has recently delivered an impressive third-quarter earnings report, prompting several in Palantir’s analyst community to upgrade the stock and raise their price targets. The company’s performance is being fueled by a surge in demand for AI solutions, particularly in the government sector. However, with a valuation that some analysts consider too rich, investors are left wondering if there is still time to buy Palantir stock.

Understanding Palantir's Core Offerings

Palantir Technologies offers three primary software platforms designed to empower organizations to leverage the power of AI:

• Palantir Gotham: Originally developed for the US intelligence community, Gotham enables users to analyze data from diverse sources, identifying patterns and trends to support informed decision-making. It has since found broad use in law enforcement and public safety, fraud detection, and other sectors.
• Palantir Foundry: This customizable and secure platform allows organizations to build and deploy AI models, enabling them to create data-driven applications across various industries. Foundry provides a robust suite of tools for data visualization, analytics, and model building, supporting improved efficiency and decision-making.
• Palantir Apollo: Designed for continuous delivery and deployment of secure software, Apollo is recognized by the Department of Defense as a Mission Critical National Security System. It accelerates software development by providing secure access to sensitive information and networks, leading to faster and more efficient development cycles.

Strong Q3 Earnings Drive Remarkable Growth

Palantir's earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) underscored the company's position as a leader in the rapidly expanding AI software market. Revenue soared 30% year-over-year and 7% quarter-over-quarter to $726 million, surpassing analysts' expectations of $705.11 million. This growth was driven by strong demand for AI solutions across government and commercial sectors.

Adjusted earnings per share (EPS) climbed even faster, jumping 43% to $0.10, exceeding analysts' projections of $0.09 per share. This strong performance reflects the increasing adoption of Palantir's platforms, fueled by the growing demand for AI-powered solutions.

The company's expanding customer base and market share are evident in the impressive surge in the number of deals it closed. Palantir landed 104 deals worth at least $1 million last quarter, a 30% increase from the same period last year. Notably, the number of deals valued at $5 million or more also increased to 36 from 29 in the year-ago period. The number of deals valued at $10 million or more jumped from 12 to 16, demonstrating the company's ability to secure larger and more strategic contracts.

Palantir's remaining performance obligations (RPO) increased by 58% to $1.57 billion, highlighting a healthy revenue pipeline. This metric reflects the total future value of a company's contracts yet to be fulfilled, and for Palantir, this growth is primarily driven by commercial contracts.

Furthermore, the company's remaining deal value (RDV), which includes government and commercial contracts, increased by 22% to $4.5 billion. This increase underscores Palantir's continued momentum and positions the company for sustained growth in the long run.

Based on these strong Q3 results, Palantir has raised its 2024 revenue guidance to just over $2.8 billion, signifying a projected year-over-year growth of nearly 26%. This positive outlook further strengthens Palantir's position as a leader in the dynamic AI software market.

A Strategic Partnership Fuels Government AI Adoption

Palantir’s commitment to expanding its presence in the government sector was further reinforced by a strategic partnership with Anthropic and Amazon Web Services (AWS). This partnership aims to make Anthropic's Claude AI models accessible to U.S. Intelligence and Defense agencies on AWS.

By integrating Claude into its AI Platform (AIP), Palantir can provide government clients with advanced AI capabilities for tasks such as:

• Processing vast amounts of complex data rapidly.
• Elevating data-driven insights and identifying patterns and trends.
• Streamlining document review and preparation.

This partnership equips U.S. government officials with powerful tools that can significantly enhance their decision-making abilities in time-sensitive situations while preserving their authority. This is a critical step in the evolution of AI in government, and Palantir is positioning itself as a key player in this emerging terrain.

The Weight of Valuation: Is Palantir Overpriced?

Palantir's strong performance and growth potential have driven its stock price up considerably. However, the company is trading at a high valuation, with a price-to-sales (P/S) ratio of 46 and a price-to-earnings (P/E) multiple of 255. These multiples are significantly higher than the average for the U.S. technology sector.

Some investors are concerned that Palantir's valuation might be too high, considering the risks associated with its rapid growth and the potential for competition to increase. However, several factors support the current valuation:

• The AI software platform market is expected to see strong growth, generating annual revenue of $153 billion by 2028. This suggests that Palantir's market opportunity is significant and has the potential to drive substantial growth in the coming years.
• Palantir's operating margin improved to 38% in Q3 2024, demonstrating strong unit economics. This suggests that the company is effectively converting revenue into profits, supporting its high valuation.
• Consensus estimates project an impressive 59% annual earnings growth rate for Palantir over the next five years. This strong growth trajectory, coupled with the company's dominant position in the AI market, justifies the current valuation to a degree.
• Palantir's forward price / earnings-to-growth ratio (PEG ratio) is 0.42, suggesting that the company is undervalued relative to its expected growth. This metric, along with the other valuation metrics, suggests that Palantir's stock price may have room for further appreciation in the coming years.

The Long-Term Growth Potential

Palantir is strategically positioned to capitalize on the rapid adoption of AI across multiple sectors. The company's focus on specific verticals, particularly the government and intelligence sectors, gives it a unique advantage in these rapidly growing markets.

While the company faces risks associated with its high valuation and the potential for increased competition, its commitment to innovation, its strong unit economics, and its revenue pipeline suggest a promising future for Palantir.

Investors considering investing in Palantir should carefully weigh the risks and rewards. However, its growth potential and market leadership position make it a compelling investment for those seeking exposure to the fast-growing AI software market. With careful research and due diligence, investors can make informed decisions about whether Palantir Technologies is the right fit for their portfolio.