Palantir is a high-risk, high-potential-return stock.
Palantir (PLTR 0.68%) stock has been on fire lately.
Since the company reported its second-quarter 2024 results last week, the stock is up by 25% as of this writing, thanks to its solid growth of 27% on top line . The company also raised its full-year guidance, suggesting the current momentum will continue.
Current shareholders are rightfully delighted by the stock’s performance. But for those who have yet to buy shares, is now a good time to jump in given Palantir’s solid performance?
Image source: Getty Images.
Palantir reported another quarter of solid performance
Palantir came public in 2020 during the COVID-19 pandemic when digital services were in great demand. That year, it reported a mind-blowing 47% revenue growth rate. But since then, revenue growth has declined for many quarters — reaching a low of just 13% in the second quarter of 2023 — before picking up again to above 20% by the end of 2023. Investors were therefore unsure whether the recent pickup in revenue growth rate would be sustainable.
Palantir’s latest result alleviates those concerns, with accelerating growth of 27% in revenue to $678 million. Not only that, the adjusted operating margin also reached a new milestone of 37% as operating leverage kicks in. The company also reported GAAP net income of $134 million, up from $28 million a year earlier.
Beyond its solid financial performance, operational metrics also came in strong. For instance, Palantir closed 123 U.S. commercial deals, up 98% year over year. U.S. commercial customer count also grew 83% year over year, contributing to a 55% rise in commercial revenue. The huge increase in commercial revenue suggests that the tech company’s diversification into the commercial sector is picking up steam.
In short, Palantir is firing on all cylinders, and its strong performance could continue for many years, riding on tailwinds like artificial intelligence (AI).
There is a massive opportunity in artificial intelligence
One of the biggest trends in recent years is the proliferation of AI usage in corporations and our daily lives. In particular, the rise of generative AI (and services like ChatGPT) demonstrates to even the unsophisticated user how AI could change our lives.
While plenty of attention has been focused on huge companies like Nvidia, Microsoft, and Alphabet, smaller but more narrowly AI software-focused companies like Palantir have also been a direct beneficiary of this trend. In particular, Palantir’s experience in providing software platforms in the public sector to harness the power of its unstructured database gives it an advantage in this AI race.
Moreover, while companies are rushing to implement the latest AI technologies to avoid losing out to competitors, they prefer to work with companies with proven track records rather than just another wannabe start-up. Unsurprisingly, many companies contacted Palantir, with more than 1,025 companies completing its AIP Bootcamp. This bootcamp has been massively successful for Palantir, leading to deals worth up to seven figures.
The huge interest among corporations in AI technology accelerated U.S. commercial customer growth in the latest quarter by 83% to 295. For perspective, that number was just 14 in the same quarter in 2020. While impressive, Palantir has probably just scratched the surface of the enormous opportunity ahead, considering that the AI market is expected to reach $826 billion in 2030.
Palantir can upsell its AI services to existing clients, convert the 1,025 organizations that have completed the AIP Bootcamp, and recruit new customers for future bootcamps. It could also continue growing its suite of AI tools over time as AI technologies advance. For instance, it may consider launching services catering to consumers, diversifying its business further.
In short, the sky seems to be the limit!
Investors are, understandably, in a euphoric mood
With so many opportunities ahead of Palantir, it is not surprising that investors are incredibly optimistic about the potential upside in the stock price.
Palantir trades at a price-to-sales (P/S) ratio of 31, more than four times that of Alphabet’s P/S ratio of 6.5. And herein lies the problem. A company with a great prospect is not necessarily a great investment. Investors must also buy the stock at a reasonable price to get downside protection and a solid potential upside return.
Unfortunately, Palantir’s stock doesn’t offer that kind of prospect for investors. On the contrary, its sky-high valuation means that the company must execute flawlessly or risk getting a rerating on its valuation.
In other words, the stock is, at best, a high-risk, high-potential-return bet.
What it means for investors
Palantir is surfing a mega-tailwind that could last for years if not decades. Still, the stock is excessively priced, making it too risky for new investors to jump in now.
So, except for those with a huge risk appetite, most investors should keep Palantir on their watch list for now.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
