Palantir (PLTR) is emerging as one of the leading AI companies worldwide, developing powerful platforms such as Gotham, Foundry, Apollo and AIP. Since the start of this year, the company has more than doubled its value thanks to robust earnings results, demonstrating advances in AI. While opinions are divided on the current appeal of PLTR stock, I remain bullish on the stock despite the long prices. This trust is rooted in Palantir’s unique position in the AI revolution, which is still in its early stages.
In this article, I will highlight and discuss recent developments regarding Palantir and explain why the current valuation premium may be justified.
Palantir’s rally this year
Palantir shares have posted triple-digit gains this year, surging more than 140% to hit an all-time high. Several key factors have come together in recent months to fuel this impressive increase.
First, the company’s commercial activities have seen accelerated revenue growth. In its second-quarter earnings report released on August 5, Palantir recorded a 55% year-over-year increase in revenue from its commercial sector, while government contracts rose 24%. Another indication of strength comes from Palantir’s margins. Palantir achieved an operating margin of 16% in the second quarter, up 1,400 basis points year over year, continuing its trend of increasing profitability. Operating income increased significantly from $10.1 million in the second quarter of 2023 to $105.3 million in the second quarter of 2024.
Additionally, the potential mass adoption of Palantir’s Artificial Intelligence Platform (AIP) has proven to be a major catalyst. With AIP, Palantir has demonstrated unique technology that I believe is comparable to Nvidia’s (NVDA) microchips. In the second quarter alone, the company closed 27 deals worth $10 million or more.
A final reason for the price increase was Palantir’s inclusion in the S&P 500 index (SPX). The stock was included in the index on September 23, boosting investor confidence, especially among institutional investors.
A crucial metric reveals a lot about Palantir
One of the main pillars of my optimism about Palantir lies in a metric the company first reported in its most recent quarter: its standing against the Rule of 40. The much-discussed Rule of 40 suggests that even as a SaaS (Software as a Service) company currently has low revenues, it could still be a good investment if its revenue growth and profit margin percentages combine to be 40 or more.
During the Q2 earnings call, CEO Alex Karp highlighted that Palantir currently has a Rule of 40 score of 64, with revenue growth of 27% and an adjusted operating margin of 37%. While it’s clear that Palantir is beating the benchmark, how important is a score of 64?
Comparing Palantir’s Rule of 40 score to other well-known SaaS companies, we can see that it stands out. For example, Adobe (ADBE) has a score of 51, Salesforce (CRM) has a score of 38, and CrowdStrike (CRWD) has a score of 37.
It’s worth noting that while these companies have lower scores than Palantir for a variety of reasons, achieving a higher score is becoming increasingly difficult. Companies with high scores on the Rule of 40 must maintain either very high growth rates or very high operating margins. Most companies excel in one area, but not both. However, Palantir currently scores well on both components.
Analysts predict Palantir’s revenue growth will remain above 20% annually until at least 2027, which would further support the company’s position against the Rule of 40, especially if margins are at least stable.
PLTR Stock Valuation: The Main Discussion Point
One of the main factors dividing Palantir’s bulls and bears is undoubtedly the company’s valuation. There’s no denying that some traditional multiples are being stretched. Palantir trades at a price-to-earnings ratio of around 120x, which is more than double the multiple Nvidia trades at, for context. Even adjusting this multiple for growth, based on EPS estimates of 24.5% for the next three to five years, Palantir’s PEG ratio is above 4.8, compared to Nvidia’s at 1.28. This proves the market’s very optimistic expectations for Palantir’s future.
Is this premium justified? I believe that paying a premium for a stock is only justified if the company offers something uniquely valuable or disruptive. In the case of Palantir, there is definitely something special from my perspective. The company is a pure-play software provider, specialized in AI solutions for companies and government agencies. In CEO Alex Karp’s most recent letter to shareholders, he highlighted the “relentless wave of demand” from customers for production-ready AI systems, and Palantir is one of the few companies that can meet that demand today.
Given these factors, I believe Palantir is uniquely positioned to capitalize on the trillion-dollar AI market and capture a significant share of the enterprise software sector, which is expected to reach approximately $790 billion by 2032.
Is PLTR Stock a Buy According to Wall Street Analysts?
According to TipRanks, Wall Street analysts have a Hold consensus on PLTR stock. Of the sixteen analysts covering the stock, six recommend ‘Hold’, six ‘Sell’, while only four recommend a buy. The average PLTR price target is $27.67, more than 35% below the current share price.
Conclusion
While Palantir’s multiples may seem too high for a new investment at this point, the premium valuation seems justified as the company positions itself as a unique AI pure play. The company’s robust results in recent quarters confirm that demand for its platforms is strong.
Furthermore, key metrics such as the Rule of 40 highlight Palantir’s distinctive position among software companies, which is likely to be maintained and even strengthened in the long term. As a disruptive technology company, I believe the premium valuation of PLTR stock is justified, even though traditional valuation metrics may not fully capture the company’s comprehensive value. I remain bullish on PLTR stock.
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