Is Palantir Stock a Buy Now?

Key Points

• Palantir stock has delivered stunning gains in the past year, bringing its valuation to extremely expensive levels.

• However, the rapid growth in the company's revenue and earnings seems sustainable thanks to the growing adoption of its artificial intelligence (AI) software solutions.

• Growth-oriented investors can consider looking past Palantir's valuation, as its red-hot stock market rally is likely to continue.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) stock delivered astronomical gains of 600% to investors in the past year, and it looks like the artificial intelligence (AI) software specialist could keep marching higher following the release of its latest quarterly report.

Palantir released its second-quarter results on Aug. 4. Soaring demand for the company's Artificial Intelligence Platform (AIP) allowed it to beat Wall Street's expectations, and it also raised its guidance for the full year. However, investors may now be wondering if it makes sense to buy Palantir stock following the massive gains it has clocked in the past year, especially considering the mind-boggling valuation it is trading at.

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Let's see if Palantir has enough fuel in the tank to justify its expensive valuation and deliver more gains to investors.

Image source: Getty Images

Palantir's growth continues to accelerate

Palantir reported a 48% year-over-year increase in revenue in Q2 to just over $1 billion. This was the company's first ever billion-dollar quarter in terms of revenue. It is worth noting that Palantir reported a 27% year-over-year increase in revenue in the same quarter last year, meaning that its growth accelerated impressively in the previous quarter.

Palantir management credits its improving growth trajectory to the rapidly improving demand for AIP, both from existing and new customers. Palantir's AIP is being deployed in multiple industries ranging from healthcare to automotive to telecom to banking, among others. This platform allows customers to integrate generative AI into their operations to boost productivity, reduce redundancy, and improve operational efficiency, all of which help them achieve substantial cost savings.

As a result, Palantir says that it is witnessing "new starts with higher ambition, and existing customers expand their work at a faster rate." On the other hand, the company's government-related revenue also jumped an impressive 49% year over year. The company's AI-focused software capabilities are in solid demand from government customers, as evident from the decade-long $10 billion contract it signed last week with the U.S. Army.

The terrific demand for Palantir's AI software solutions in both the commercial and federal segments is setting the company up for stronger growth in the long run by helping it build a robust revenue pipeline. After all, the company signed a record $2.3 billion worth of new contracts last quarter. Palantir's total contract value jumped a phenomenal 140% year over year, which was nearly triple the pace at which its top line expanded.

This outstanding jump in Palantir's contract value last quarter pushed up the company's remaining deal value (RDV) by 65% from the year-ago period to $7.1 billion. With RDV referring to the total value of Palantir's unfulfilled contracts at the end of a quarter, it can be safely said that the company is sitting on a solid backlog that should allow it to grow at an even better rate in the future.

Additionally, investors should note that the contract expansions that Palantir is signing with customers are having a positive impact on its margins. Its adjusted operating income margin jumped by nine percentage points from the year-ago period to 46%. It is easy to see why that's happening, as Palantir isn't having to spend more money on getting new business from existing customers.

Considering that the company continues to add new customers at a nice clip -- its customer count increased by 43% in the previous quarter -- there is scope for further improvement in its margins once new customer accounts start expanding the usage of Palantir's solutions.

Palantir reported a 78% year-over-year increase in adjusted earnings last quarter to $0.16 per share. The company's adjusted operating income guidance of $495 million for Q3 would translate into a 79% jump from the year-ago period, indicating it is well-placed to sustain its outstanding earnings growth rate.

Finally, when we consider the long-term opportunity available in the AI software platforms market that Palantir is serving, the company seems capable enough to justify its expensive valuation.

Why investors may want to look past the valuation

With a price-to-earnings ratio of 700, investors will have to pay a massive premium if they want to buy into Palantir's growth story right now. Of course, the forward earnings multiple of 285 is significantly lower on account of the healthy earnings growth that the company is witnessing, but even that's quite expensive.

However, with the global AI software market expected to generate a whopping $440 billion in annual revenue in 2029, Palantir seems to be positioned at the beginning of a remarkable growth curve. As the demand for its AIP grows and it wins more business from existing customers, the company should be able to keep growing its earnings at eye-popping rates.

Palantir's growth exceeds the 28% annual growth rate the AI software market is projected to clock in the next five years, indicating that it is cornering a bigger share of the $440 billion revenue opportunity on offer. So, Palantir can become a much bigger company in the long run, which is why investors may consider looking past its valuation at its remarkable growth could be rewarded with more upside on the stock market.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.