Palantir Technologies (PLTR) has been on a rollercoaster ride for investors, with its stock price plummeting 38% from its 52-week high of $207.52. But amidst the turmoil, a recent Wall Street upgrade has sparked a debate: is it time to buy back in? While the earnings have certainly caught up to the price, the question remains: is the valuation justified? In my opinion, the answer is a nuanced 'it depends'.
The Compounding Business
Palantir's business has been on a remarkable compounding journey. With first-quarter revenue soaring 85% year over year to $1.63 billion, and U.S. commercial revenue skyrocketing 133%, it's clear that the company is experiencing exponential growth. This is further evidenced by the 206 deals of at least $1 million closed during the quarter, and the total contract value reaching $2.41 billion, up 61% year over year. The U.S. government revenue growth of 84% is particularly notable, indicating that the commercial side is now the faster-growing engine.
Impressive Profits
Palantir's profits have been equally impressive. With GAAP net income of $871 million last quarter, a 53% profit margin, and earnings per share of $0.34, the company is delivering strong results. Adjusted free cash flow of $925 million, a 57% margin, and a balance sheet with $8 billion in cash and short-term Treasuries further solidify the company's financial strength. The Rule of 40, a shorthand for growth-and-profit mix, reads 145 for Palantir, indicating a robust combination of growth and profitability.
The Valuation Conundrum
However, the valuation remains a conundrum. Trading at about 145 times earnings and 86 times forward earnings, Palantir's valuation is still wildly high. But, as the article points out, this is a fraction of what buyers were paying at the peak, when the earnings were smaller, and the price was $78 higher. Management's guidance for full-year revenue of about $7.65 billion, with U.S. commercial revenue climbing at least 120%, suggests that the company is on track to achieve its targets.
Risks and Considerations
Despite the impressive growth and profits, risks persist. Government spending cycles can change, and competition in artificial intelligence (AI) software is intensifying. The size constraint, with Palantir already ranking among the largest software companies in the world, also poses a challenge. Additionally, the downside risk if growth unexpectedly slows is significant, given the stock's valuation of 86 times forward earnings. These factors should not be overlooked.
My Perspective
Personally, I think shares are closer to a hold than a buy. While the underlying businesses could justify the current stock price, I'd like to see a bigger margin of safety before investing. A price meaningfully below my estimate of the stock's intrinsic value would provide a buffer against potential downsides. This way, if things go worse than expected, shares could still perform decently. In my opinion, the current valuation is still too high to justify a buy, and investors should proceed with caution.
