Palantir (NYSE: PLTR) has sent mixed signals to investors. The Artificial Intelligence Platform (AIP) has delivered exponential productivity gains to its customers. One said Palantir achieved more in a day than a hyperscaler did in four months. Another claimed to build 10 times faster with 3 times fewer resources.
The problem for investors in the software-as-a-service (SaaS) stock has been that those gains haven’t seemed to translate into financial results. A boost in a key metric, however, could mean Palantir is finally in the running.
What has changed
In short, the most important metric to watch is turnover.
Palantir began by leveraging AI and machine learning within its Gotham platform to uncover analytical insights in the national security and law enforcement domains. Historically, investors knew Palantir for helping the government find Osama bin Laden.
Later, to maintain growth, Palantir developed Foundry to apply the same principles to commercial sector applications. But while this would have dramatically expanded Palantir’s addressable market, growth rates had fallen back into the teens, despite earlier promises of 30% annual revenue growth from 2022 to 2025.
Moreover, even the launch of AIP did not initially lead to such growth. As recently as 2023, revenue had grown by only 17%. And in the first quarter of 2024, it had not increased significantly, to $634 million, an annual gain of 21%.
Only in the recently released Q2 2024 report was revenue reported to be $678 million, up 27% from the previous year.
Also, Palantir’s Q3 revenue, which it predicts at $697 million to $701 million, implies 25% revenue growth at the midpoint. While that’s not quite 30%, the company is finally close to hitting that revenue growth target.
One deal that could help achieve that revenue growth target is Palantir’s agreement with MicrosoftThe partnership will combine Microsoft and Palantir’s generative AI capabilities to build AI-driven operational workloads, likely making it a more powerful offering than either company could deliver alone.
Profit and appreciation
Additionally, unlike when Palantir made that promise in 2021, the company is now profitable on a generally accepted accounting principles (GAAP) basis and has been since the fourth quarter of 2022.
Not surprisingly, revenue growth has driven a significant increase in profits. Net income of $136 million for Q2 is well above the $28 million it earned in Q2 2023.
Furthermore, given AIP’s apparent success, investors should not be surprised that its share price is up more than 60% year-over-year.
With that profit, it’s no surprise that Palantir is forecasting positive net income for the remaining two quarters of the year. That does make the stock quite expensive indeed. The modest profits of the past few quarters likely mean that the 173 P/E ratio is a poor reflection of the valuation, but with the recent forward P/E ratio of 82, the stock is likely ahead of the fundamentals.
Still, investors may wonder to what extent valuation matters, especially when comparing Palantir to NvidiaThe productivity gains from its AI chips have pushed Nvidia’s stock to a price-to-book ratio of 53, well above Palantir, which sells for 16 times book value.
Granted, Nvidia’s triple-digit revenue growth isn’t a guarantee that Palantir will match Nvidia’s revenue growth pace. But it does say something about how quickly a stock can grow when revenue growth is more closely aligned with productivity gains.
Palantir moves forward
Given the increased revenue growth, Palantir appears to finally be able to meet the expectations that bulls had for the stock.
Palantir investors have faced considerable frustration. Revenue growth over the past two years has fallen short of expectations. Moreover, even with the huge productivity gains offered by AIP, revenue growth was respectable, but well below the original target of 30% per year.
However, the 27% revenue growth in the most recent quarter and the huge productivity gains that AIP offers its customers may finally have translated into rapidly improving financial results for Palantir. The partnership with Microsoft could also help it meet or exceed its previous revenue growth targets.
Palantir will likely need to continue to increase its productivity growth to justify its valuation. However, if the company continues to report faster revenue growth, the stock could continue to rise despite its high price-to-earnings ratio.
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Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Improvements in This Metric Could Be the Bullish Signal Palantir Stock Needs was originally published by The Motley Fool
