Is Palantir Stock a Buy?

It's hard to overstate the success of Palantir Technologies (NASDAQ: PLTR). After struggling through its early history as a publicly traded company, the stock has surged since mid-2023, and it's the best-performing stock in the S&P 500 since the start of 2024, now up 584% in a little over a year as of Feb. 13 (Palantir was added to the index in September 2024).

Palantir's deep data analytics software and its Artificial Intelligence Platform (AIP) have made it indispensable for the U.S. military and other government agencies, as well as big businesses.

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Its revenue growth has now accelerated over each of the last six quarters, and it has delivered a similar improvement in operating margin during that period.

The stock soared on the fourth-quarter earnings report earlier this month as it easily beat estimates on the top and bottom lines. Overall revenue jumped 36% to $828 million, and adoption is surging in the U.S. with total revenue in its home country up 52% to $558 million. Both U.S. commercial and government sales were strong, with revenue up 64% and 45%, respectively.

But in Europe, Palantir's growth has essentially stalled, and CEO Alex Karp criticized continental Europe for looking to the past for technology rather than adopting futuristic platforms like Palantir's.

The software company has earned much of its recent gains, but does that make the stock a buy? Let's examine the value proposition for investors, and what Palantir's valuation means for the future of the stock.

Image source: Getty Images.

What makes Palantir unique?

Palantir got its start shortly after 9/11, helping counterterrorism agencies sift through massive amounts of data to make connections they might have otherwise missed. The company calls this "data fusion," and the tech underpinning that kind of software is proving particularly valuable in the AI era as management has added a layer it calls ontology as part of its AI platform.

The company spent much of the recent earnings call talking about ontology, and Chief Technology Officer Shyam Sankar said, "Ontology ends up being the intermediary representation that makes your enterprise accessible to AI in a way that's governed and secure and provides the observability that you need so that you can actually trust the AI."

Palantir's deep roots in data fusion and its technology give it a significant head start over the competition. In fact, the company doesn't see itself as competing with other software companies. It says in its 10-K that it's competing with the "internal software development efforts of our potential customers," and they frequently try to build their own data platforms before turning to Palantir.

On the earnings call, Sankar said, "Palantir's real competition is a lack of accountability in government -- these forever software projects that cost an insane amount that don't actually deliver results."

Here's what the valuation really means

Palantir's business growth has certainly been impressive, but most of the gains in the stock price have come from its expanding multiple. The stock now trades at a price-to-sales ratio of 100, which is extraordinary for any stock, especially one that's now one of the most valuable companies in the world.

Based on adjusted earnings per share (EPS), the stock trades at a trailing price-to-earnings ratio (P/E) of 285. If we assume that Palantir can continue to grow revenue at 36%, its adjusted net-income margin holds steady, and its shares outstanding are steady, it would take six years for the company to grow its adjusted EPS to $2.60, which would make its PE a more reasonable 45, which assumes the stock price remains the same.

Of course, no growth in the stock over six years would be a disincentive to owing it, but that helps show how much growth is already baked into the stock. Palantir could grow even faster than that and it could expand its adjusted net margin from 35%, but that will be difficult to maintain over several years.

Is Palantir a buy?

The company's recent run has been phenomenal, and its technology is impressive. However, given its valuation, investors are better off waiting for a pullback than buying the stock at the current price. Palantir could move higher, but that would likely only stretch the valuation further, raising the chances of a pullback even more.

At this point, it's not certain the valuation is unsustainable, but it surely seems that way.

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Jeremy Bowman 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.