Palantir (PLTR -3.72%) has become one of the leading companies in artificial intelligence (AI), proving the revolutionary technology has incredible utility and value in the real world. With companies further up the value chain reaching gargantuan valuations -- Nvidia's market capitalization is currently about $3.4 trillion -- investors are eager to see AI deliver on its promise. Palantir is doing just that.
Palantir is on track
Wall Street had high expectations for the company's latest earnings. Palantir beat those expectations by a healthy margin, posting $725 million in revenue for the quarter when just $703 million was expected. That's a 27% gain compared to the third quarter of 2023.
That kind of growth is what investors love to see. Though the company has seen double-digit growth every quarter for years, that's the biggest jump since the middle of 2022. The growth was driven by a boom in the company's commercial segment, both in number of clients and overall value. Palantir's bread and butter is its government contracts. Make no mistake; that side of the business is still going strong, but commercial clients like Microsoft are becoming a bigger part of the story.
Palantir grew its U.S. client base significantly, now up 77% since Q3 2023. Demand seems to be spiking as Palantir's technology matures alongside the AI hardware that powers it. As Alex Karp, Palantir's CEO, puts it, there's a "U.S.-driven AI revolution that has taken full hold." For Karp, things are just getting started.
Along with sales growth, Palantir is cutting costs. Check out its profit margin growth over the last 3 years below.
PLTR Profit Margin data by YCharts.
A possible advantage with the incoming administration
A big part of the incredible performance of the company's shares over the last month has been the expectation that a Trump administration will mean more government contracts. Most of this is conjecture at this point, but a favorable relationship looks possible. Trump's proposed Department of Government Efficiency (DOGE), led by Elon Musk, could push for an expansion of tech within the government, viewing it as the perfect tool to achieve DOGE's namesake mission.
Trump is also reported to be considering Palantir's CTO, Shyam Sankar, for a top research and engineering job within the Pentagon.
Palantir has a lot of hype around it, so beware
I'm not going to argue that Palantir is anything other than an incredibly innovative company firing on all cylinders. That's not the issue. The issue is the company's valuation and the incredible hype that surrounds it. While it could stand to benefit greatly from the incoming administration, the market appears to be convinced it's a sure thing. If things don't turn out the way investors hope, Palantir's stock could take a big hit.
At present, Palantir's price-to-earnings (P/E) ratio is a wildly high 382, about seven times Nvidia's P/E and 15 times Alphabet's. Now, this isn't exactly apples to apples, but it's still useful to provide some context. The truth is that valuation metrics are only so useful when dealing with a company with as much potential as Palantir. With this sort of valuation, the company has to continue to post monster numbers quarter after quarter. Take Nvidia. It more than doubled its earnings per share (EPS) last quarter, yet its stock is down from before it reported earnings.
Palantir also faces a lot of competition from established players like Oracle and IBM and smaller, AI-native companies like Snowflake. Are its products that much better? Can it maintain that edge consistently? Will the potential for a close relationship with the new administration materialize?
With this sort of valuation, I would hold off on Palantir unless you are particularly risk-tolerant. I think it will prove difficult for the company to deliver the kind of growth it needs over the next five years to justify its current valuation.
