Analysis

Is Palantir Technologies Stock a Buy Now?

The AI company has received a shot in the arm following the initiation of positive coverage by a Wall Street firm.

Palantir Technologies (PLTR -6.73%) stock received a boost on June 17 after a Wall Street firm initiated coverage on the stock. Shares of the company, which is known for providing software and analytics platforms to both government and commercial customers, rose more than 6% in a single session.

Independent research firm Argus Research gave Palantir stock a buy rating along with a $29 price target. That points toward potential gains of 16% from current levels. Argus analyst Joseph Bonner points out that Palantir is on track to gain from the growing adoption of its artificial intelligence (AI) software platform by commercial customers, which could help the company increase its earnings at an annual rate of 19% for the next five years.

It is worth noting that Palantir stock has now gained nearly 46% so far in 2024 following its latest pop. Does this mean it is too late for investors to buy this AI software play right now? Or can investors still consider buying Palantir in anticipation of more gains? 

Palantir Technologies is expensive for a reason

Palantir stock’s healthy surge in 2024 means that it is now trading at 25 times sales. That’s higher than the price-to-sales ratio of 18 at the end of last year. Additionally, the software specialist’s trailing price-to-earnings ratio is also quite rich at 208. Investors who are looking to add Palantir to their portfolios may be wondering if it is worth paying such a rich valuation for the stock.

After all, Palantir’s expensive multiple means it is prone to volatility. For instance, the stock crashed last month after the company’s first-quarter earnings barely matched Wall Street’s expectations and its 2024 revenue guidance fell slightly short of consensus estimates. However, Argus Research points out that Palantir is a “highly differentiated” company. The firm adds that its commercial business is going to be its next big catalyst.

It is easy to see why the research firm is upbeat about Palantir’s commercial business. A couple of years ago, market research firm IDC pointed out that Palantir was the top player in the global AI software platform market in terms of both revenue and market share. This puts the company in a terrific position to make the most of the booming demand for AI software.

Gartner predicts that AI software spending could hit $298 billion in 2027, with government spending accounting for $70 billion after three years. Palantir’s legacy as a provider of software platforms to federal agencies will come in handy to help it tap this market. After all, Palantir gets 53% of its revenue from selling its software platforms to government agencies.

Its government-related revenue increased 16% year over year in the first quarter of 2024 to $335 million. However, there is a good chance that Palantir could witness stronger growth in this segment as it has been winning more AI-related government contracts.

The U.S. Department of Defense, for instance, awarded a $480 million contract to Palantir last month that will be in force through 2029. The agency will be using Palantir’s Maven AI platform to detect potential targets automatically by accumulating and analyzing data from multiple sources. This is not the only government contract Palantir has landed of late for deploying its AI expertise; the U.S. Army awarded it a $178 million deal in March to build an AI-powered ground station system.

But at the same time, investors shouldn’t forget that the demand for Palantir’s AI platforms remains solid among commercial customers as well, and its growth from this segment far exceeds the growth of the government business.

This is the next big catalyst for the company

Palantir’s commercial revenue increased 27% year over year in Q1 to $299 million. However, the revenue pipeline the company is building in the commercial business points toward impressive long-term growth in this segment.

Management pointed out on its May earnings conference call that its total contract value (TCV) in the commercial segment shot up an impressive 187% year over year to $505 million. According to Palantir, this metric refers to “the total potential lifetime value of contracts entered into with, or awarded by, our customers at the time of contract execution.” What’s also worth noting is that Palantir finished Q1 with a total remaining deal value (RDV) worth $4.1 billion, up 22% from the previous year.

Palantir says RDV is the “total remaining value of contracts as of the end of the reporting period,” and is indicative of the healthy revenue pipeline the company is sitting on. Even better, the strength in Palantir’s deal activity is translating into solid growth in the company’s commercial customer base. Its commercial customer count in the U.S. jumped 69% year over year in Q1 to 262, while the overall commercial customer count increased 53% year over year to 427.

The company is also witnessing stronger deal activity — it closed 87 deals worth $1 million or more in Q1 2024, up from 64 in the same period last year. All this clearly indicates that commercial customers are warming up to Palantir’s software offerings, and the company’s government business is likely to gain more momentum as well thanks to recent developments.

As a result, there is a solid chance that Palantir’s growth in 2024 could be better than expectations and the lucrative AI-related opportunity could help it deliver healthy growth in the long run. That’s why investors who are looking to invest in a growth stock can still consider buying Palantir as its growing revenue pipeline could help it justify its valuation.

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

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