Why Palantir Technologies Stock Surged 16% to a New All-Time High in July

Key Points

• Palantir reported several new deals, adding to its growing backlog.

• Customers continue to flock to the company's Artificial Intelligence Platform (AIP), its biggest growth driver.

• Palantir's valuation is outrageous, but that may not matter as much over the long term.

• 10 stocks we like better than Palantir Technologies ›

Shares of Palantir Technologies (NASDAQ: PLTR) were off to the races last month, soaring 16% in July and hitting a new all-time high, compared to just a 2.3% increase for the S&P 500, according to data provided by S&P Global Market Intelligence.

The data mining and artificial intelligence (AI) specialist announced several new contract wins, suggesting the adoption of AI continues to gain steam.

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New deals and growing optimism on Wall Street

Palantir reported several new contracts during July, and two in particular are noteworthy.

First, Palantir announced its Warp Speed for Warships program designed to help the U.S. Navy "accelerate warship production, fleet readiness, and digital transformation." By digitally connecting the network of shipbuilders, suppliers, and critical partners, the program will use data to modernize communication and coordination.

The other important contract is with the U.S. Army. What made this deal particularly noteworthy is that it could be worth as much as $10 billion over the coming decade, making it Palantir's largest signed contract to date. The agreement combined 75 individual contracts into a single enterprise deal, establishing a "comprehensive framework for the Army's future software and data needs."

These contracts also helped fuel bullish sentiment among several Wall Street analysts. Analysts at Piper Sandler initiated coverage on Palantir at an overweight (buy) rating, assigning a price target of $170 (the stock has since eclipsed that benchmark). The analysts cited Palantir's "one-of-a-kind growth," suggesting the company can deliver a revenue run rate of $24 billion by 2032.

Analysts at Loop Capital were similarly bullish, maintaining a buy rating and increasing their price target to $178 (the stock has since surpassed that benchmark as well). The analysts said they expected Palantir to deliver a beat and raise quarter when it reported in early August (it did).

The elephant in the room

Bears are quick to point out Palantir's egregious valuation, and rightfully so. The stock has a price-to-earnings (P/E) ratio of 616 and an only slightly more palatable 218 times next year's earnings. With multiples of that magnitude, the stock is subject to extreme volatility, and some investors suggest that the stock will never grow into its valuation.

I would counter that Palantir has delivered eight consecutive quarters of accelerating revenue growth, is solidly profitable, and has an industry-leading Rule of 40 score of 94%, pointing to the high quality of its earnings. The company's remaining performance obligation (RPO), which provides insight into future revenue, grew 77% to $2.42 billion. Furthermore, Palantir stock has notched gains of 1,830% over the past year, enriching patient investors.

Don't get me wrong. I think the road ahead will be a rocky one, but for investors planning to hold the stock for the coming decade, I believe Palantir has a vast amount of potential. Those concerned about the valuation may just want to buy a small position or dollar-cost average into the stock.

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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.