Palantir's Big Quarter, Bigger Valuation: Buy or Wait?

Banking on the boom in artificial intelligence (AI), tech behemoths such as NVIDIA Corporation NVDA, Alphabet Inc. GOOGL and Amazon.com Inc. AMZN, to name a few, have seen substantial expansion, raising doubts about their growth prospects.  

However, smaller companies, including Palantir Technologies Inc. PLTR are drawing more investor attention, thanks to record-breaking quarters and raised forecasts. But does this make Palantir a solid stock to buy now? Let’s delve into it –  

Palantir Reports Blowout Q3, Raises Guidance 

It's been an outstanding third quarter for Palantir as its AI offerings accelerated revenue growth. In the third quarter, Palantir's revenues reached $1.18 billion, reflecting a 63% year-over-year increase and 18% quarter-over-quarter growth, easily beating Wall Street estimates, according to investors.palantir.com.  

Most of the revenues were generated from the U.S. commercial segment, which saw sales jump 121% year over year and 29% quarter over quarter to $397 million in Q3. U.S. government revenues also rose 52% year over year and 14% quarter over quarter, totaling $486 million last quarter. 

The strong results reflected rapid expansion in the U.S. commercial sector, outpacing the government segment, as many enterprise clients continue to adopt Palantir's successful Artificial Intelligence Platform (AIP). CEO Alex Karp and the management team highlighted several large AI enterprise deals.

Consequently, Palantir has raised its revenue guidance to between $1.327 billion and $1.331 billion for Q4 and to $4.396 billion to $4.400 billion for the full year. 

Karp also noted that Palantir posted an impressive $476 million in GAAP net income in Q3, nearly half a billion dollars in just three months. He mentioned in his letter to shareholders that this figure now exceeds what the company once earned in revenues over the same period. The GAAP net income margin was 40%. 

Great Quarter, High Valuation – Is Palantir Still a Buy? 

The increasing popularity of the AIP platform is fueling Palantir's revenue and profit growth. Its expanding U.S. commercial client base suggests potential long-term growth, and steady government contracts create a barrier for new competitors. These positives should encourage shareholders to maintain their investment in Palantir stock. 

However, new investors should be cautious. It's advisable to wait for a significant price correction before buying Palantir stock, as it appears overvalued relative to its earnings. The company's forward price-to-earnings (P/E) ratio stands at 290.32, significantly higher than the Internet-Software industry's average of 41.17.  

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Concerns about stretched valuation aside, Palantir's business remains predominantly U.S.-focused, with limited international presence, making it vulnerable to domestic disruptions.  

Currently, Palantir carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
 

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This article originally published on Zacks Investment Research (zacks.com).

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