Is Palantir Stock a Buy, Sell, or Fairly Valued After Earnings?
Palantir Technologies, known for its strong position in artificial intelligence, released its third-quarter earnings report on November 3. This report surprised many, as it exceeded nearly all management expectations.
Palantir’s Earnings Highlights
In after-hours trading, Palantir’s stock saw a slight decrease despite positive financial metrics. Notably, the company achieved a “Rule of 40” score of 114%, its highest to date. This score is the sum of revenue growth and operating margins.
Key Metrics
- US commercial sales increased by 121% year-over-year, up from 92% in the previous quarter.
- Net dollar retention reached 134%, the highest in the software industry.
- International and government sales rose by 32% and 52%, respectively.
Valuation Insights
Despite its growth, Palantir’s current valuation presents challenges. The stock trades at approximately 120 times its revenue, significantly higher than other AI firms. Such a premium raises questions about whether the stock is a buy, sell, or fairly valued. Analysts suggest the company requires an annual growth rate of 45% for five years to justify these levels.
Fair Value Assessment
Morningstar has adjusted its fair value estimate for Palantir. The new estimate suggests a price target of $135 per share, up from $115. This adjustment reflects a notable increase in guidance and confidence in Palantir’s unique offerings.
Economic Moat Rating
Palantir holds a narrow economic moat rating. This rating stems from high switching costs and unique intangible assets. Although several competitors exist, such as AWS and Snowflake, Palantir sets itself apart with its ability to process complex datasets effectively.
Financial Position and Liquidity
Palantir’s financial health appears robust and is improving. The company’s cash reserves stand at approximately $900 million, with an additional $5 billion in marketable securities and no debt. Their liquidity has improved significantly this year, reflecting a strong operational foundation.
Risks and Market Uncertainties
The company has been assigned a Very High Uncertainty Rating. This rating is primarily due to uncertainties linked to the breadth of its potential market and customer penetration levels.
Investor Perspectives
- Bullish View: Palantir is seen as a leader in AI. Its software is pivotal for businesses embracing digitization and automation.
- Bears’ Concerns: Critics argue that Palantir’s target markets are limited and that decreasing AI costs may lead to increased competition.
In conclusion, while Palantir Technologies shows strong growth potential and impressive metrics, its high valuation presents risks. The question of whether Palantir stock is a buy, sell, or fairly valued requires careful scrutiny of both market trends and financial performance moving forward.
