Our investment journey with Palantir Technologies Inc. (PLTR) has been dynamic. We’ve successfully navigated entry and exit points, capitalizing on significant gains in 2023. Currently, we hold a “house position,” a long-term investment reflecting our belief in the company’s potential. However, for short-term traders, we previously recommended a tactical sell in November 2023 around the $20-$21 range, anticipating a potential repurchase opportunity near $17. The stock obliged, dipping considerably, and we subsequently issued an update highlighting its renewed attractiveness.
Palantir’s recent earnings paint a mixed picture. While revenue exceeded expectations, the growth pace compared to prior years has slowed. This, coupled with a premium stock price, suggests limited upside in the immediate future. However, positive factors remain.
Growth Drivers and Market Trends
AI Tailwinds: The global race for AI supremacy is fueling demand for Palantir’s data analytics solutions. Recent bipartisan calls for increased AI funding in the US and Palantir’s expanding partnerships like the one with Eaton (ETN) solidify this trend.
Solid Customer Acquisition: Both government and commercial segments are experiencing customer growth. Notably, US commercial revenue is particularly strong, with a 40% year-over-year increase and a 69% year-over-year rise in US commercial customers. This validates the effectiveness of Palantir’s expanded sales team and the increasing demand for its AI offerings.
Government Contracts: Palantir continues to secure lucrative government contracts, such as the recent $480 million project with the US Department of Defense. This reinforces their position as a key player in the national security landscape.
A Cause for Caution: Declining Cash Flow.
Despite positive customer and revenue growth, Palantir’s cash flow has declined from the previous year. This is a cause for concern and warrants close monitoring. While a single quarter doesn’t establish a trend, future performance will be crucial in determining the sustainability of this growth.
Is Palantir Overvalued?
While Palantir’s valuation metrics have improved compared to past years, they still indicate an expensive stock. The current price of $24 per share translates to a hefty 18 times forward sales. This valuation may be difficult to justify with only a projected 20% revenue growth. Analyst expectations for EPS growth are also somewhat muted, requiring Palantir to exceed forecasts and raise future guidance to demonstrate strong growth potential.
Our Investment Thesis
We remain bullish on Palantir’s long-term prospects. The company is a leader in the burgeoning AI field, boasting a strong customer base, and continues to secure lucrative government contracts. However, the current stock price reflects this optimism, leaving limited room for significant gains in the near term.
Investor Takeaway
For long-term investors, holding onto Palantir stock makes sense, given its long-term growth trajectory. However, short-term traders may want to consider alternative strategies to capitalize on the stock’s volatility. Options strategies like selling covered calls could generate income while still maintaining some long-term exposure.
The key for Palantir’s future success lies in its ability to maintain and accelerate customer acquisition, deliver consistent EPS growth that surpasses expectations, and improve its cash flow margins. We will continue to closely monitor these developments and provide further updates as they unfold.