Palantir Technologies (PLTR) +2.87% has seen tremendous gains lately, with its Q3 results driving a surge in its share price. The company delivered excellent numbers across the board, showcasing notable progress in both its government and commercial segments. Notably, Palantir achieved an unreal Rule of 40 score, which indicates excellent revenue growth and operating margin performance.
Government Segment Performance
Palantir’s Government revenues grew by 33% year-over-year to $408 million, with the U.S. government division leading the charge. This can be attributed to the Department of Defense’s growing reliance on Palantir’s AI capabilities, highlighted by a recent five-year contract valued up to $100 million. The growth in this segment shows no signs of slowing down.
Commercial Segment Performance
The commercial segment also showed remarkable growth, rising 54% year-over-year and 13% quarter-over-quarter to $179 million. This boosted Palantir’s total commercial revenues to $317 million, up 27% year-over-year. The driving force behind this growth is Palantir’s focus on integrating its Artificial Intelligence Platform (AIP) into commercial applications.
Rule of 40 Score
Palantir’s performance in Q3 earned it a Rule of 40 score of 68%, which is generally considered excellent. However, the stock’s valuation has climbed to dizzying levels, with Palantir trading at 49 times this year’s expected revenues and 159 times this year’s expected earnings per share (EPS).
Valuation Concerns
The rich multiples demanded by the current valuation could be challenging to sustain even with Palantir’s unique positioning in the market. To put it into perspective, a more reasonable valuation of 10 times sales in ten years would require a compound annual growth rate (CAGR) of 30%. This is relatively modest given the risk involved.
Analyst Consensus
Wall Street now appears more cautious on the stock’s outlook, with Palantir currently holding a consensus rating of “Hold.” Recent analyst ratings consist of three Buys, seven Holds, and six Sells over the past three months. The average PLTR stock price target implies a 42.82% downside potential.
Conclusion
Palantir’s Q3 performance was impressive, but the current valuation raises concerns about the stock’s ability to sustain its growth. While Palantir’s overall prospects are highly compelling, especially considering the adoption of AI among government agencies and enterprises, the risk-reward balance appears less favorable at present levels. As a result, the author has shifted their outlook on the stock to neutral.
Source: https://www.tipranks.com/news/article/palantir-nysepltr-delivers-astonishing-results-but-is-the-valuation-justifiable