Why Palantir Stock Plunged Today
Key Points
Palantir beat on sales and earnings last night.
Investors are more worried about a potential slowdown later this year.
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Palantir (NASDAQ: PLTR) stock tumbled 5% through 10:25 a.m. ET Tuesday morning despite beating on top and bottom lines in its Q1 earnings report last night.
Heading into the report, analysts forecast Palantir to earn $0.28 per share (pro forma) on $1.5 billion in sales. Instead, Palantir earned $0.34 per share -- GAAP -- on $1.6 billion in sales.
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Palantir Q1 earnings
Palantir boasted an 85% revenue growth rate in Q1, the company's highest-ever, U.S. growth was even faster -- 104%. Net income more than quadrupled. Palantir's profit margin hit 60%, resulting in a "Rule of 40" figure similar only to other popular AI stocks such as Micron (NASDAQ: MU) and Nvidia (NASDAQ: NVDA).
Palantir considers this a prime financial objective, balancing sales growth and sales profitability, such that the sales growth rate percentage plus the margin on "adjusted income from operations" add up to 40% or better.
At Palantir, it's 145%.
What's next for Palantir stock?
So that's the good news. Palantir is growing sales faster than ever, and earnings even faster than sales. What's wrong with that?
Well, a couple things, potentially. New contracts scored in the quarter increased by only 61% year over year. That's slower than Q1 sales growth, and may foreshadow slower growth ahead. True, management raised its sales guidance for the rest of this year, forecasting 71% sales growth.
But again, that's smaller than the 85% rate seen in Q1 -- a slowdown.
The way I see it, therefore, the story is this: Palantir's still growing like a weed, and becoming more profitable by the day. But at 164 times earnings, its valuation demands that it keep on doing this. A forecast sales slowdown is the opposite of what growth investors were looking for.
That's why they're selling Palantir stock today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
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