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Should You Buy Overvalued Palantir Stock After Q3 Earnings?

Amit Singh - Barchart - Tue Nov 5, 7:56AM CST

Palantir Technologies (PLTR) has emerged as a stock market favorite in 2024, joining the ranks of other high-performing companies like Nvidia (NVDA). The company’s stock has delivered an astounding 141% gain year-to-date, far outpacing the S&P 500 Index's ($SPX) growth of about 20%.

In today's session, PLTR is trading more than 14% higher ahead of the bell, as Wall Street cheers the company's third-quarter (Q3) earnings report. In fact, outspoken CEO Alex Karp kicked off the company's earnings call by saying, “Given how strong our results are, I almost feel like we should just go home.”

But are the Q3 results enough to overtake Wall Street's notorious concerns about Palantir's lofty valuation? Here's a closer look at the stock's growth story, and the Q3 performance.

What’s Behind the Massive Rally in Palantir Stock?

Palantir has emerged as a notable player in the artificial intelligence (AI) market, which is experiencing enormous growth as industries worldwide invest heavily in AI infrastructure. The demand for AI-driven solutions has catapulted stocks in this sector to new heights, and Palantir’s story is no different. A significant contributor to this growth is the company’s Artificial Intelligence Platform (AIP), which is gaining traction.

Adding to the momentum, Palantir recently joined the S&P 500 Index, often a confidence boost for investors. And its recent Q3 performance has kept the stock on a growth trajectory, thanks in part to the success of its U.S. commercial segment and AIP, which has been instrumental in driving revenue and expanding its customer base.

Valuation Concerns Take a Back Seat

Palantir is undoubtedly performing well, but its stock is trading at a steep valuation. This means that the positives are already reflected in Palantir stock.

Despite the high valuation, market participants seem unfazed and willing to pay a premium as they see significant potential for Palantir in AI. The ongoing rally in Palantir stock has led to valuation considerations taking a back seat to growth potential, underscoring how sentiment can sometimes overshadow traditional valuation metrics.

Given this background, is it worth ignoring Palantir’s valuation? Let’s explore.

Can Palantir Sustain This Momentum?

Palantir’s growth in both commercial and government sectors has been impressive, with solid sales growth and increasing operating margins. In Q3 2024, revenue hit a record $726 million—up 30% from the previous year—as the company continues scaling. This marks the sixth consecutive quarter of accelerated revenue growth, rising from 13% in Q2 2023 to 30% in Q3 2024.

PLTR also achieved its highest-ever profit in Q3, with net income reaching $144 million. This growth was supported by an expanded adjusted operating margin, now at 38% from 29% in Q3 2023, underscoring the company’s attractive unit economics.

A large part of Palantir’s success lies in AIP, which has helped secure significant contracts. In Q3 alone, the company closed 104 deals valued at over $1 million each, leading to a total contract value (TCV) of nearly $1.1 billion, up 33% year-over-year. This growth reflects Palantir’s ability to retain customers and boost average revenue per client, with its customer base increasing by 39% to 629 by the end of Q3.

Palantir’s commercial revenue rose 27% year-over-year to $317 million, with its U.S. Commercial division experiencing high demand, mainly due to AIP’s popularity. The government segment also saw a 33% revenue increase, suggesting room for further growth in public sector applications.

Overall, Palantir’s strong momentum across its U.S. commercial and government segments, favorable unit economics, new products, and the expanding adoption of AIP suggest that the momentum in its business will likely sustain.

Additionally, Palantir raised its guidance for 2024 across key performance metrics, indicating continued growth and reinforcing investor confidence.

Analyst Sentiment: Caution Despite Strong Performance

Despite its strong year-to-date performance, Palantir’s price-to-sales (P/S) ratio remains high at 42.19, a valuation well above industry norms. As a result, many analysts currently recommend holding, rather than buying, the stock.

Wall Street’s average price target sits at $27.14, hinting at a potential 34% downside from Monday's close.

However, Palantir’s momentum has consistently outperformed analyst expectations, and the stock’s uptrend may continue if investor confidence remains high.

Bottom Line: Should You Ignore Palantir’s Valuation?

While high valuations are a legitimate concern, Palantir’s impressive growth story, expanding market share, and continued success in AI-driven solutions are hard to ignore. As the company sustains its growth pace, it could keep attracting investor interest, even at a premium.

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On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.