Palantir's Growth Has Kept Accelerating, but Can the Rally Continue?

Palantir (NASDAQ: PLTR) has put up some incredible growth figures over the past few years. However, there is a limit to how much a company can continue accelerating its growth rate before it runs out of clients to expand with. For Palantir investors, growth is the lifeblood of the stock, and without it, it isn't a worthwhile investment.

So, can Palantir keep it up? Let's take a look.

Image source: The Motley Fool.

Palantir continues to exceed results

Palantir has been in the artificial intelligence (AI) game longer than most. It has over two decades of experience, and has products that allow clients to keep their existing systems and integrate Palantir's software into them, making deployment very easy. Furthermore, it has deep ties to the U.S. government and has locked in several use cases there. That gives the company two sectors to grow into, and each of them has delivered outstanding results.

Palantir has seen most of its success in the U.S., as the rest of the world hasn't gone all-in on AI. In Q2, its U.S. commercial revenue increased 149% year over year to $764 million. Meanwhile, U.S. government revenue rose 90% to $809 million. Overall, Palantir's growth rate was 93%, making Q2 another period of revenue growth acceleration, and continuing a pattern that it established in 2023.

PLTR Revenue (Quarterly YoY Growth) data by YCharts.

The question investors need to ask themselves is: When could Palantir's growth top out? That could make or break the stock.

For Q3, Wall Street analysts expect revenue to grow at an 84% pace, which would be a slowdown in growth on a percentage basis. However, Palantir has also dramatically exceeded expectations every single quarter over the past few years, so it may blow past them again.

I think the key to Palantir's continued growth rate lies in its commercial customer count. In Q2, its U.S. commercial customer count rose 6% quarter over quarter to 653. This growth rate is steadily slowing, and while it's still quite rapid overall, the lack of new clients could start to slow Palantir's overall growth rate. If that happens, the stock could be in trouble, because it is valued at a hefty premium based in part on its rapid growth.

Palantir trades at a steep premium

Palantir isn't a growth-at-all-costs company that is sacrificing profitability in pursuit of top-line growth. It delivered an impressive profit margin of 55% during its latest quarter.

PLTR Profit Margin (Quarterly) data by YCharts.

Because of that, I think it makes sense to measure the stock relative to its earnings, and from a trailing price-to-earnings standpoint, Palantir is incredibly expensive.

PLTR PE Ratio data by YCharts.

At nearly 150 times earnings, it's one of the more expensive stocks out there, especially when you consider that the business is already optimized to produce maximum profits. Most stocks trade somewhere in the range of 20 to 40 times earnings when they are fully profitable, even if they are growing at a rapid pace like Palantir is.

In order for Palantir's P/E ratio to fall to 40 times earnings at the current share price, it would have to increase its earnings by over 250%. That's a lot of growth that today's stock buyers are counting on.

Even if Palantir maintains a rapid growth rate, there are still several years' worth of growth baked into the stock price, which will eat into shareholders' potential future returns. Unless the company can continue growing at nearly a 100% rate over the next year and a half, I think the stock price will actually fall over the next few years. As a result, I think investors should look at other AI stocks instead.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.