Palantir (NYSE:PLTR) was initially founded to support improved decision-making within the U.S. government’s counterterrorism personnel. Since then, the big data analytics firm has expanded well beyond its initial raison d’etre.
Palantir has seen a significant uptick in commercial clients, with U.S. commercial revenues soaring by 55% year-over-year in Q2 2024.
Driven by rising revenues, profitability, and strong demand for its AI offerings, Palantir stock has skyrocketed over 160% in 2024. This remarkable growth has led to a valuation significantly higher than many peers in the tech sector.
As the company prepares to release its Q3 2024 results next week, investor Stephen Ayers is sounding a note of caution, given the stock’s lofty valuation.
“I recommend holding Palantir stock until it demonstrates consistent growth in both revenue and free cash flow to justify its premium valuation,” Ayers opined.
Ayers explained that Palantir would need to hit 30% in both revenue growth and free cash flow margins to support its current valuation. While the investor believes PLTR is nearing these figures, it still needs to prove its ability to meet these benchmarks over extended periods of time.
Doing so would place it on par with other tech paragons of growth, such as Nvidia, Amazon, and Google.
“These companies did not achieve sustained 30%+ revenue growth by mistake; they benefited from significant network effects, scalable business models, international expansion, and entry into new high-growth markets,” Ayers explained.
While acknowledging that PLTR could very do the same, the investor also pointed out that PLTR has a “narrow path” to reach its elevated valuation.
Looking toward the Q3 earnings, Ayers will focus on whether Palantir has sustained its revenue acceleration within its commercial client base.
“Growth in this segment is critical for diversifying its revenue base beyond government contracts and establishing a stronger presence in high-margin industries such as healthcare, energy, and finance, where they presumably have greater pricing power,” the investor noted.
In other words, Ayers is not quite ready to bestow the moniker of “super company” on Palantir just yet, and has therefore given the company a Hold (i.e. Neutral) rating. (To watch Ayers’ track record, click here)
Ayers’ assessment is reflected by analysts on Wall Street as well. With 4 Buy, 7 Hold, and 6 Sell ratings, PLTR holds a consensus Hold (i.e. Neutral) rating. There seems to be some agreement that the stock’s valuation has overheated somewhat, as its 12-month average price target of $27.85 represents a 38% downside from current levels. (See PLTR stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
