Is Palantir Stock a Buy Now? – laparenthese-gourmande

Actions of Palantir Technologies (NASDAQ:PLTR) has more than tripled over the past 12 months, with most of that gain coming in the past three months alone. Since the start of September, the stock has soared 134% as of this writing and boasts a rich valuation of 64 times trailing 12-month revenue and 187 times this year’s consensus earnings estimate.

It’s fair to say that Palantir might be the most valuable artificial intelligence (AI) stock on Wall Street right now. Even the leader in AI chips Nvidiawhich just posted a 94% year-over-year increase in quarterly revenue, trades at a much lower price-to-earnings ratio than Palantir.

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Successful investing is often about seeking the highest growth at the lowest valuation. As with anything you want to buy, the stock market is the same: you want to find the best quality at the lowest price.

Is Palantir stock worth buying at these lofty highs? They are a relatively small company pursuing a huge opportunity in AI. Let’s take a closer look at why investors are willing to pay a premium for the stock and whether you should buy it now or wait for a better price.

The reason investors are paying such a high valuation for Palantir is quite simple. AI is redefining the business landscape of the 21st century. The company is winning large contracts in droves, accelerating its revenue growth.

Its product is so good that the government trusts it to process classified information as part of military and intelligence operations. With these capabilities, the company can price its software in a way that achieves high profit margins.

Over the past year, revenue growth has steadily improved, from 13% in the third quarter of 2023 to 30% a year later. Palantir has seen success with its “boot camps,” where customers can see the product in action and how it can be implemented in their operations. This shortens the transaction cycle and helps accelerate revenue.

Digging a little deeper into revenue performance, U.S. commercial revenues grew 54% year-over-year in the third quarter, while U.S. government revenues grew 40%. This is a notable improvement in government operations, which recorded a revenue increase of just 12% year-on-year in the third quarter of 2023.

Optimism about Palantir’s prospects is further supported by exceptional margins. It reported net income of $144 million last quarter, bringing its net profit margin to 20% for the quarter and 18% year-over-year.

The increase in free cash flow, which measures the actual cash produced by a company after capital expenditures, is also a good indicator that the company is generating quality profits that are not manipulated by accounting maneuvers. Palantir’s free cash flow was $980 million over the past year, representing an even higher revenue margin of 37%.

But even with this high free cash flow margin, it might not be enough to support the company’s $161 billion market cap. With a price to free cash flow (P/FCF) multiple of 174, the company could double its FCF overnight, and the stock would still look expensive at a P/FCF multiple of 85.

I wouldn’t buy a parabolic stock at this valuation. Palantir has been volatile over its trading history, so there’s a good chance the stock will stabilize at some point and offer investors a more reasonable valuation to start buying it.

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*Stock Advisor returns as of December 2, 2024

John Ballard holds positions at Nvidia. The Motley Fool ranks and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

Is Palantir Stock a Buy Now? was originally published by The Motley Fool