AI and data solutions provider Palantir Technologies (PLTR) is expected to report its third-quarter results on November 4, aiming to continue its impressive growth trajectory this year. While momentum in the AI sector remains strong, I am concerned about Palantir’s ability to continue its rally. Specifically, the company relies heavily on positive annual guidance updates to demonstrate that demand for its software remains robust, which could pose a risk if future updates fall short. That’s why I believe a neutral stance for Palantir may be wise ahead of its third quarter report.
Additionally, while Palantir’s AI growth story is still in its early stages and its fundamentals could ultimately justify its current share price in the coming years, I believe that investors who purchased shares at these valuations prior to the Q3 report may have been overly optimistic pay multiples. .
Before I dive into the reasons for my skepticism about Palantir’s ability to maintain its impressive bullish momentum, it’s important to highlight the factors that have contributed to its remarkable triple-digit growth in market value over the past twelve months.
Over the past two quarters, Palantir reported revenue growth of 20.8% in the first quarter and 27.1% in the second quarter, with gross profit rising 24% and 28%, respectively. This led to a gross profit margin of 81%, surpassing Nvidia’s (NVDA) margin of 75%. Much of this success can be attributed to the expansion of the commercial sector, particularly the AI-powered Foundry and AIP platforms, which grew 55% year-over-year in the second quarter, compared to a 24% increase in government contracts. CEO Alex Karp noted a “relentless wave of demand” for production-ready AI systems, and highlighted Palantir’s unique ability to meet that demand.
Over the past two quarters, Palantir has consistently raised its full-year guidance, largely due to strong commercial revenue growth, with annual growth estimates rising from 45% in the first quarter to 47% in the second quarter. The company also revised its expectations for total revenue, raising its full-year 2024 estimate from $2.677 to $2.689 billion in the first quarter, to $2.742 to $2.750 billion in the second quarter. Additionally, it adjusted its revenue from operating guidance to $966 to $974 million, up from the Q1 forecast of $868 to $880 million.
While it’s hard to argue with Palantir’s strong performance in the first half of the year, I believe that moving forward, hitting the high estimates won’t be enough to maintain the bullish momentum. With expectations for the third quarter already sky high, Palantir is facing additional pressure. While I expect the company to beat these estimates, I believe an upward revision to full-year expectations will be key to maintaining the stock’s momentum.
The company gave third-quarter revenue guidance of $697 million to $701 million, with Wall Street favoring the higher end. All sixteen analysts covering the stock have revised their estimates upward, resulting in a consensus of $703.4 million, which represents annual growth of 26%.
Furthermore, with an adjusted net income forecast of $233 million to $237 million for the third quarter – indicating a potential annual increase of 46% at the high end – Wall Street is forecasting an EPS consensus of $0.09, which represents an annual increase of 29. 8% reflects. All analysts have also increased their EPS estimates in the past three months.
As Palantir’s growth story centers on the massive demand for AI, which is still in its early stages, there is a strong belief that the company will continue to revise its annual guidance upward to better reflect its growth prospects. I think whether this quarter is a success or a miss will largely depend on any updates to the full year guidance. This is because current projections do not appear to be sufficient to fully justify Palantir’s lofty valuations, a topic I will explore further.
One of the main reasons for my skepticism about Palantir’s ability to maintain its bullish momentum following its third-quarter results is the extremely high valuation multiples the company is trading at.
Currently, Palantir is valued on metrics such as 35 times forward revenue, 120 times forward earnings and 135 times cash flows. This valuation makes Nvidia—arguably the biggest leader in AI—seem relatively undervalued by comparison, despite being considered an expensive stock and despite Nvidia’s higher growth expectations for both revenue and earnings.
The situation is further exacerbated by growth estimates that do not appear robust enough to justify such high figures. Palantir’s revenue is expected to grow at a growth rate of 20.4%, surpassing the industry average of 6%. For 2025, revenue is expected to grow by approximately 21.2%, followed by 20% through 2026. Earnings per share growth is forecast at 42.3% in 2024 with expected earnings per share of $0.36, and a more moderate 21.4% in 2025, which comes to an estimated $0.43. By 2026, earnings per share could reach $0.52, indicating growth rates of 42%, 21% and about 19% over the three-year period.
A key bullish argument for Palantir’s valuation is its improved free cash flow, which rose from negative $308.9 million in 2020 to an expected range of $800 million to $1 billion, according to company guidance. At the midpoint of this guidance, free cash flow is roughly three times Wall Street’s net income consensus of $297 million, based on EPS projections. This indicates that Palantir is becoming more profitable and generating enough cash to sustain and expand its operations.
Sometimes a company can even be a better investment at a higher price if there is more clarity about management and the path to profitability, especially for those in the early stages of growth. In the case of Palantir, each quarter has provided more insight, with expectations consistently revised upwards. This is why, despite the stock’s stringent valuation metrics, an upward revision to annual guidance could still lead to a significant increase in the stock price.
A troubling sign is that even Palantir’s management – which knows the company best – is selling shares rather than buying at these prices.
CEO Alex Karp sold approximately 8.7 million Palantir shares worth more than $300 million under a trading plan, while co-founder Peter Thiel also initiated a trading plan to sell shares worth $28.5 million, totaling nearly $1 billion. Of course, there are several reasons why insiders are selling their shares, but it’s hard to believe they would sell now if they expected continued rapid share growth in the short to medium term.
Using the TipRanks Insider Transactions tool, we can see that insiders are selling a higher amount of PLTR stock compared to what is being bought.
At TipRanks, analysts rate PTLR stock as a Hold, with six out of sixteen giving neutral recommendations, another six giving bearish ratings, and only four offering bullish outlooks. The average PLTR price target is $27.67, which indicates a 36.21% downside potential.
View more PLTR analyst ratings
I rate Palantir a Hold ahead of its third-quarter earnings report. While the company has made solid progress this year, I worry that its triple-digit growth and high valuation metrics could hinder performance in the coming quarter, potentially dampening bullish momentum.
Given the amount of hype surrounding the stock, simply meeting the high end of estimates won’t be enough. An upward revision to the guidance is needed to convincingly demonstrate how the growth story justifies the staggering triple-digit earnings and cash flow valuation figures.
Revelation
