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Palantir (NASDAQ: PLTR) stock has been a brilliant investment in recent years. Over the last 12 months, the tech company’s share price has jumped about 460% while over the last 24 months, it’s risen almost 1,150%.
I’ve had this growth stock on my watchlist for ages but I’ve never pulled the trigger. Is now the time to get in on the action? Let’s discuss.
What’s this company all about?
Palantir specialises in sophisticated artificial intelligence (AI) based software that’s designed to help customers use their data to gain a competitive edge. Founded in 2003, it has had a lot of success serving government agencies like the FBI and the CIA. More recently however, it’s been moving into the corporate space. And it’s having success here too.
Strong Q1 results
We can see this success in the company’s recent Q1 results. For the quarter, US commercial revenue was up a whopping 71% year on year to $255m. Overall, revenue was up 39% year on year to $884m.
During the quarter, the company closed 139 deals of at least $1m, 51 contracts of at least $5m, and 31 of at least $10m – impressive stuff!
On the back of these strong results, the company raised its guidance for 2025. It now expects total revenue growth of 36% and US commercial revenue growth of 68%.
We are delivering the operating system for the modern enterprise in the era of AI.
Alex Karp, co-founder and CEO of Palantir
Breaking the rule of 40
One thing to note here is that in the first quarter, Palantir easily broke the ‘rule of 40’. This is a widely used benchmark in the software industry that suggests that a company’s revenue growth rate plus its profit margin should equal or exceed 40%. In Palantir’s case, it delivered a rule of 40 score of 83% in Q1. Again, that’s impressive.
Having said that, profits continue to be relatively low. For the quarter, adjusted net income attributable to common stockholders was $334m, or $0.13 per share.
The valuation
What about the valuation though? Well, this is where things get a little challenging for me. I don’t think the price-to-earnings (P/E) ratio’s the right valuation metric to use here. When a company’s doing disruptive things like Palantir is (and seeing prolific growth) but still has low earnings, P/E ratios tend to be meaningless.
We could look at the price-to-sales ratio though. Today, the market-cap’s $281bn. Meanwhile, for 2025, Palantir expects to generate sales of around $3.9 billion. So we have a price-to-sales ratio of about 72.
That’s very high. For reference, Nvidia‘s on about 14 while cybersecurity company CrowdStrike and data analytics firm Snowflake are on 20 and 16 respectively (all of these stocks are considered expensive).
My view
Given the high price-to-sales ratio, I won’t be buying the stock right now. To my mind, the valuation’s too high.
At present, Palantir’s priced as if it’s going to keep growing at 40% a year indefinitely. History shows however, that’s unlikely to happen – at some stage growth’s likely to slow (a recession could be a catalyst).
I’m going to keep the stock on my watchlist though. At the right price, I could be interested in taking a small position.
