Palantir Stock: Lots to Like, Even if Overpriced

Palantir Technologies (NYSE:PLTR) is a data analytics company that helps businesses and governments make sense of vast amounts of information.

Initially founded to serve the U.S government, Palantir has now expanded to helping other governments and businesses through its data analytics and artificial intelligence (AI) tools.

Palantir has been one of the fastest growing tech companies in recent years, thanks to its aggressive investment in recruiting and retaining top talent, while also growing its sales team. Palantir is currently aiming to capture as much of its $120-billion total addressable market as it can, and management sees favorable market trends ahead, particularly the increasing use of data in business decisions and operations.

I am neutral on Palantir, given that its tremendous growth momentum and runway is largely offset by its rich valuation. (See PLTR stock charts on TipRanks)

Strengths

Palantir has been able to maintain strong client relationships and charge a premium for its consulting services because of the valuable data analytics tools it provides.

It has also made it easier to integrate with existing datasets, which means customers don’t have much choice but to stick around if they want access to this specialized AI technology.

Recent Results

Palantir's revenue grew to $376 million, up 49% year-over-year, in Q2 2021. This was in large part due to 66% year-over-year growth in government revenue, on the back of new deals with agencies like the U.S. Air Force, U.S. Coast Guard, U.S. Army, and Center for Disease Control.

Furthermore, its U.S commercial revenue surged 90% year-over-year. Palantir also saw 175% year-over-year contract value growth, and added 20 net new customers during the quarter.

Last, but not least, Palantir saw its profitability metrics improve meaningfully year-over-year. Adjusted free cash flow margin came in at 13%, adjusted gross margin rose by 200 basis points year-over-year, and the company's contribution margin improved by 300 basis points year-over-year.

As a result, management doubled Palantir’s full-year adjusted free cash flow guidance from over $150 million to over $300 million.

Valuation Metrics

While the growth is spectacular, Palantir has a very rich valuation at present and is diluting shareholders through its aggressive stock-based compensation program.

In fact, when accounting for the stock-based compensation, the company is free cash flow negative and running a loss.

Furthermore, its EV/EBITDA is a whopping 105.4x, and its NTM market cap-to-free cash flow ratio is an incredibly high 333x. While revenue growth is strong, it will need to grow at a high rate for a long period of time to justify PLTR's current valuation.

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Wall Street’s Take

From Wall Street analysts, Palantir earns a Moderate Sell analyst consensus, based on one Buy rating, two Hold ratings, and three Sell ratings in the past three months. The average PLTR price target of $23.80 puts the downside potential at 10.2%.

Summary and Conclusions

Palantir operates in one of the most dynamic industries in the world, and should continue to grow rapidly in the foreseeable future.

Between its wide moat government business, which is seeing very strong growth, and its innovative commercial business, which is just starting to see growth accelerate, Palantir is positioned to see revenue increase many times over in the coming decade.

That said, the valuation is extremely rich right now, and analysts on Wall Street are moderately bearish on Palantir’s total return prospects.

As a result, it might be best to wait for the next pullback in share price before buying shares.

Disclosure: On the date of publication, Samuel Smith had a long position in PLTR.

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