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Palantir is seeing unprecedented demand for artificial intelligence (AI). Why has the stock fallen?

Sometimes it doesn’t seem to matter what a company does in a quarter: the stock still sells after the report. That’s true Palantir (NYSE:PLTR) found himself. After investors pushed the stock higher ahead of its May 6 earnings report, Palantir stock fell 15% after the company reported earnings. Even after a small recovery, Palantir is down 8% from its pre-earnings price.

So is this a buying opportunity?

Palantir’s new AI product is driving a lot of commercial growth

Palantir is widely recognized as a leader in artificial intelligence (AI) as it has a relatively long history with the technology. With the new wave of AI focused on generative AI, Palantir has also left its mark.

The Palantir Artificial Intelligence Platform (AIP), which gives customers the tools to integrate AI products into a business, is all the rage: Management has said demand for it is unlike anything the company has ever seen.

AIP has been a major driver of the growth of its commercial business, especially in the US. In the first quarter, U.S. commercial revenues rose 40% year over year, but that was slower than the 70% growth Palantir experienced in the fourth quarter. Since this segment is a key part of Palantir’s growth thesis, it’s possible the slowdown scared off investors and led some to sell the stock.

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But selling now would be a big mistake, as Palantir as a whole is doing very well.

Palantir shares are still expensive

Overall, Palantir’s revenue rose 21% year over year to $634 million, exceeding the $616 million upper end of management’s expectations. Management also raised its 2024 guidance range – previously $2.652 billion to $2.668 billion – to $2.677 billion to $2.689 billion.

In short, the first quarter was a classic beat-and-raise quarter, which investors normally applaud.

Palantir’s profitability is also growing; the profit margin of almost 17% was a record high.

PLTR Profit Margin Chart (Quarterly).

PLTR Profit Margin Chart (Quarterly).

This shows that Palantir is not just a company that wants to grow at any cost. Instead, management takes advantage of the current environment responsibly.

But even the best company’s stock purchased at the wrong price can become a bad investment.

Based on the forward price-to-earnings (P/E) ratio of 66, Palantir seems expensive. However, it’s not entirely fair to judge Palantir by that benchmark, as the company hasn’t yet reached the profitability levels of other software companies. More mature software companies like Adobe can have quarterly profit margins of around 30%.

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However, its price-to-sales ratio (P/S) of 22 is expensive no matter how fast the company grows.

PLTR PS Ratio ChartPLTR PS Ratio Chart

PLTR PS Ratio Chart

This is a red flag to me, as it shows that Palantir stock is still quite pricey, even after the 17% overall share price decline in the wake of the earnings report. Palantir can (and probably will) be a successful AI company that will see a lot of growth in the coming years. However, the price that investors now have to pay for the stock is worrying. Investors who buy in at this level may not make much money from Palantir for years to come.

I’m not a buyer at these prices. The valuation has to drop even further before I’m willing to buy some shares.

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Keithen Drury holds positions at Adobe. The Motley Fool holds positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.

Palantir is seeing unprecedented demand for artificial intelligence (AI). Why has the stock fallen? was originally published by The Motley Fool

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