Long-Term vs. Short-Term: The Investment Dilemma with Palantir (PLTR)

Palantir Technologies Inc. (PLTR), a prominent data-analytics software company, is at a crossroads, presenting a dilemma for investors grappling with the dichotomy between its promising long-term growth potential supported by its strategic AI initiatives and the short-term risks posed by its elevated valuation and volatility.

Long-Term Growth Potential: Riding the AI Wave

Palantir has established itself as a leading player in data analytics, leveraging its sophisticated software platforms to cater to diverse sectors, including government, healthcare, and finance.

Bloomberg Intelligence report projects generative AI to be a $1.30 trillion market by 2032, growing at a CAGR of roughly 43% over the next ten years. Surging demand for generative AI products could add around $318 billion in software spending by 2032. PLTR is well-poised to capitalize on industry trends as businesses continue to prioritize data analytics and AI integration into their operational frameworks.

In mid-2023, PLTR launched its Artificial Intelligence Platform (AIP) to help corporations develop and deploy AI applications, which has proven highly successful. AIP leverages machine learning and AI technologies to transform data into actionable insights, enabling organizations to make better decisions and optimize their operations.

Later last year, the company introduced AIP Bootcamps, a hands-on-keyboard acceleration program for customers to go from zero to use case in just a few hours. Since its launch, approximately 850 AIP Bootcamps have been completed in the U.S. and worldwide — with concentrations of customers in Detroit, Chicago, New York City, Washington D.C., and more.

Earlier this month, PLTR and Tampa General Hospital (TGH), one of the nation’s leading academic health systems, announced a significant step forward in their long-term partnership to deliver an ambitious vision for the future of AI in healthcare. TGH plans to deploy Palantir’s AIP to provide a Care Coordination Operating System. Also, it will leverage this platform to bring automation to other system workflows, like streamlining revenue cycle management.

In May, Palantir’s subsidiary, Palantir USG, Inc., was selected by the Department of Defense Chief Digital and Artificial Intelligence Office (CDAO) to participate in scaling data analytics and AI capabilities across the Department of Defense. Beginning with an initial order of $153 million to support specific Combatant Commands and the Joint Staff, further awards may reach up to $480 million over a span of 5 years.

Also, PLTR and Intelligent power management company Eaton extended their partnership to bring Palantir’s AIP to Eaton’s operations.

Palantir’s First-Quarter Results Signal Robust Enterprise AI Adoption

For the first quarter that ended March 31, 2024, PLTR reported revenue of $634.34 million, beating analysts’ estimate of $617.61 million. That compared to the revenue of $525.19 million in the same quarter of 2023. The company’s commercial revenue rose 27% from the year-ago value to $299 million, and its government revenue grew 16% year-over-year to $335 million.

Palantir’s U.S. commercial revenue grew 40% year-over-year to $150 million. The U.S. commercial customer count increased 74% from the prior year’s period to 262 customers. The rapid growth in the company’s U.S. commercial division is aided by the robust demand for its new Artificial Intelligence Platform (AIP). PLTR intends to make its AIP the most dominant infrastructure in the market and power the effective deployment of AI and LLMs across institutions.

The data analytics software maker’s adjusted income from operations was $226 million, an increase of 81% year-over-year, and represented a margin of 13%. It is the sixth consecutive quarter of expanding adjusted operating margins. PLTR’s adjusted EBITDA rose 76% from the previous year’s quarter to $234.90 million.

Palantir’s adjusted net income attributable to common stockholders rose 83.4% from the prior year’s period to $196.94 million. The company posted an adjusted EPS of $0.08, up 60% year-over-year. That surpassed the consensus EPS estimate by 4.1%. Further, PLTR’s adjusted free cash flow was $148.63 million for the quarter, representing a 23% margin.

Business Outlook

For the second quarter of fiscal 2024, PLTR expects revenue of between $649-$653 million. Also, the company’s adjusted income from operations is expected to be $209 million to $213 million.

For the full year 2024, the data analytics software giant increased its revenue guidance to between $2.677-$2.689 billion. However, the mid-point figure still fell short of $2.70 billion. Palantir raised its U.S. commercial revenue guidance in excess to $661 million, representing a growth rate of at least 45%. Further, the company increased its guidance for adjusted income from operations to between $868-$880 million.

Short-Term Risks: Stretched Valuation

Despite its compelling long-term prospects, Palantir has not been immune to market volatility and scrutiny over its valuation. In terms of forward non-GAAP P/E, PLTR is trading at 74.40x, 220.5% higher than the industry average of 23.22x. Likewise, the stock’s forward EV/Sales and EV/EBITDA of 18.95x and 56.04x are significantly higher than the respective industry averages of 2.91x and 14.59x.

Additionally, the stock’s forward Price/Sales of 20.27x is 609.6% higher than the industry average of 2.86x. Its forward Price/Cash Flow multiple of 66.52 is 183.2% higher than the industry average of 23.49.

Monness, Crespi, Hardt & Co. analyst Brian White recently downgraded Palantir’s stock to Sell from Neutral and set a $20 price target. Following a challenging earnings season for enterprise software companies, the analyst believes the market will shift away from stocks with inflated valuations.

PLTR’s stock, which surged around 167% in 2023 and continued to rally in the first half of 2024 with a nearly 43% gain year-to-date, has raised alarms among investors and analysts alike as they believe its valuation has reached a gluttonous extreme. Last month, the company filed a solid quarterly report, but shares plunged anyway, with Wall Street underlining the stretched valuation.

The stock was down approximately 6% over the past five days, while the S&P 500 index declined marginally.

Bottom Line

A nuanced approach is advisable for investors while approaching PLTR stock to balance potential returns with near-term risks. Investors with a long-term horizon and high-risk tolerance may find Palantir an attractive investment. PLTR’s AI expertise, strategic partnerships, and ongoing technological innovation position the company to capitalize on favorable industry trends.

Given the recent volatility and valuation concerns highlighted by analysts like Brian White, conservative investors may opt for caution in the short term. Market corrections or shifts in investor sentiment toward high-growth stocks could lead to price adjustments, potentially offering better entry points for those considering PLTR.

Before making investment decisions, thorough due diligence is essential. Assessing Palantir’s financial health, competitive positioning, and market dynamics can provide a better understanding of its risk-reward profile. So, while its AI capabilities and expanding market reach present a compelling case for long-term potential in PLTR, investors are advised to remain vigilant of short-term volatility and inflated valuation impacting stock performance.

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