Analytics software vendor Palantir Technologies (PLTR) is delivering impressive revenue and earnings growth, yet the artificial intelligence (AI) stock remains a highly debated investment in 2024. Wall Street analysts are sharply divided on whether PLTR stock is a Buy or an outright Sell, with many opting for a Hold rating while pointing to its elevated valuation. Meanwhile, the company’s management team praises its transformative formula, which promises to unlock explosive returns.
I’m bullish on Palantir Technologies’ potential to generate substantial returns over the next three to five years. Unlike several other AI stocks, the company has consistently delivered strong quarterly results without spending billions in new AI-related capital expenditures, suggesting a fundamental transformation. If analysts eventually upgrade the stock, which is likely, it can soar to new highs.
AI Transforms Palantir Technologies Stock
In a recent letter to shareholders, CEO Alex Karp credited the company’s new Artificial Intelligence Platform (AIP), launched over a year ago, for driving business transformation. New commercial customers are flocking to the AIP, deal sizes are increasing, and the company’s once-mature Government revenue segment has been rejuvenated. Government departments are rushing to incorporate new AI tools in their workflows, and a recent Microsft (MSFT) deal could accelerate adoption rates.
AI has significantly invigorated Palantir’s business over the past year as the company empowers its customers to harness generative AI tailored to their specific operations and philosophies.
For instance, quarterly revenue growth rates accelerated from 12.7% year-over-year in June 2023 to 27.2% year-over-year by June 2024. Also, net income margins expanded from 5.3% a year ago to nearly 20% in the past quarter, with normalized earnings per share soaring 80%. Faced with a thriving market, management has raised revenue and operating earnings guidance twice for 2024, and first-half results exceeded expectations.
Palantir Technologies stock ticks many boxes in a growth-oriented investor’s book. It has a robust revenue and earnings growth outlook, expanding earnings margins, and a cash-rich balance sheet — holding $4 billion in cash, cash equivalents, and treasuries (77% of assets) — that makes future investments potentially non-dilutive.
Further, it has no long-term debt in capital structure and a strong free cash flow generation profile that self-sustains the business through its rapid growth phase. Yet, Wall Street remains divided on the stock’s valuation.
The Controversy: Analysts Are Divided on PLTR Stock
Despite Palantir’s recent solid growth rates, TipRanks data displays a gloomy outlook for PLTR stock. Of the 14 analysts rating the stock in the past three months, six recommend Selling, five suggest Holding, and only three recommend Buying the tech stock. This results in a consensus Hold rating and an average PLTR stock price target of $22.42, which implies downside potential of 25.6% over the next 12 months.
Goldman Sachs (GS) analyst Gabriela Borges reiterated a Hold rating on PLTR stock after earnings, acknowledging Palantir’s strong performance but expressing valuation concerns relative to peers with similar growth rates.
In contrast, Wedbush’s Daniel Ives is bullish, assigning a Buy rating and a $38 price target based on increased large corporate deals, rising commercial deal counts, and the widely successful Artificial Intelligence Platform.
On the bearish side, William Blair’s Louie DiPalma reiterated a Sell rating, citing perceived low growth rates and overvaluation compared to industry peer Snowflake (SNOW).
Interestingly though, the consensus rating on PLTR stock has improved from a Moderate Sell in January this year. Sustained stellar execution on the company’s part, especially through strategic partnerships similar to the recent Microsoft deal, could ultimately justify the currently steep multiples on the stock, weaken the bear case, and make Wall Street bullish on Palantir.
Taking a Look at Palantir’s Valuation
Palantir is an expensively-priced growth stock coming out of a prolonged slump in 2022 to reclaim its prior trading levels. Its trailing price-to-earnings (PE) multiple of 171.8x is almost four times higher than its industry average PE of 44x. Also, high anticipated growth rates put its forward PE at 73x, which is still steep. However, the valuation story doesn’t end there.
Recent earnings margin expansions, accretive deals, and impressive revenue and earnings growth rates help boost sentiment on Palantir stock well before fundamentals keep up.
Further, valuation comparisons for PLTR are usually made against Snowflake. Although Snowflake is a somewhat good comparable stock, it’s persistently making operating losses. In contrast, Palantir has reported expanding operating margins for seven consecutive quarters. Investors will pay a reasonable premium on a proven profitable growth stock.
My Take on Palantir Stock: A Cautious Buy Before a Consensus Upgrade
I am increasingly bullish on Palantir Technologies’ unfolding long-term growth story and might buy some PLTR stock in September. The company has found a winning AI-powered formula that generates substantial revenue growth with minimal capital expenditures. Its earnings margins have expanded beautifully, and the company earns more per dollar of revenue than it used to do a year ago.
While valuation concerns are valid, finding “perfect” comparable stocks could be challenging, given Palantir’s unique AI platforms and its ever-improving profitability profile.
Analysts may eventually turn bullish on PLTR because of its consistent execution, expanded margins, and accelerating growth rates. Considering the stock’s ongoing recovery from a 2022 decline, analysts may maintain caution longer than warranted by fundamentals. Nonetheless, an eventual analyst upgrade could propel Palantir stock to new all-time highs.
