Prediction: Palantir Stock Will Skyrocket After Nov. 2

Shares of Palantir Technologies (NASDAQ:PLTR) have taken off over the past three months, jumping by an incredible 62% in such a short time amid renewed confidence in software stocks.

The artificial intelligence (AI) software specialist will release its third-quarter results after the market closes on Nov. 2, and I won't be surprised to see Palantir stock get a nice shot in the arm following its report. Let's see why that may be the case.

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Palantir can beat expectations once again

Palantir has exceeded Wall Street's earnings expectations impressively in each of the past four quarters. The company's earnings beats have been fueled by strong growth from existing customers, as well as the rapid expansion of the overall customer base.

For instance, Palantir booked $3.37 billion worth of contracts in Q2, an increase of 49% from the year-ago period. Meanwhile, its actual revenue increased by 93% year over year to $1.93 billion. So, Palantir received more contracts than it fulfilled last quarter.

The reason Palantir is landing larger contracts is that customers have been increasing their use of its Artificial Intelligence Platform (AIP) to improve productivity, reduce redundancy, and automate operations using their proprietary data. Notably, Palantir has been able to convert pilot projects and smaller contracts into bigger ones, as management noted on the August earnings call.

As a result, the company's margin profile has been improving at a nice clip. Palantir's adjusted operating margin landed at 62% in Q2, up from 46% in the year-ago period. Not surprisingly, analysts are expecting Palantir's adjusted earnings per share (EPS) to nearly double from the year-ago period in Q2 to $0.41. However, Palantir's adjusted EPS shot up by 2.5x in Q2 from the year-ago period.

Given that the company has been winning more business from existing customers, there is a solid chance its EPS growth could be much stronger than expected. Also, consensus estimates expect Palantir to guide to $0.46 in EPS for the current quarter, a potential jump of 84% over last year. Given that there is still significant room for margin expansion at Palantir, its outlook could exceed expectations.

The stock is unlikely to be held back by its expensive valuation

Palantir trades at 181 times earnings, significantly higher than the tech-focused Nasdaq Composite index's earnings multiple of 41. However, the exponential jump in the company's bottom line and its ability to continue growing faster than market expectations can help justify the valuation.

The stock's forward earnings multiple of 90 points to a big improvement in earnings. Also, Palantir has a price/earnings-to-growth (PEG) ratio of 0.63, according to Morningstar. This is a forward-looking valuation metric that's calculated by dividing a company's trailing earnings multiple by its projected annual earnings growth over the next five years.

A PEG ratio under 1 indicates that a company is undervalued relative to the growth it may deliver. So, buying this AI stock ahead of its quarterly report seems like the right move, as Palantir remains undervalued given its growth potential.

A better-than-expected report and guidance could give Palantir a nice boost after Nov. 2, which is why savvy investors looking to add a growth stock to their portfolios can consider buying Palantir before it soars higher.

Harsh Chauhan 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.