Palantir just crushed estimates again. How high can the stock go?

On November 8, 2024By Littum

Nvidia has been the clear undisputed leader of the artificial intelligence (AI) boom, but Palantir Technologies (NYSE: PLTR) is not far behind.

The data fusion specialist just delivered another stellar earnings report, and if its after-hours gains hold, it will have gained 172% year-to-date. Along the way, the company has delivered accelerating revenue growth, quickly built its commercial business and gained access to S&P 500thanks to its soaring market value and its consistent and growing generally accepted accounting principles (GAAP) profitability.

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More than any other company, Palantir has also established itself as one of the software companies best leveraging emerging AI technologies, largely because of its Artificial Intelligence Platform (AIP).

The stock jumped 12.6% after hours on Monday as it reported third-quarter revenue growth of 30% year over year to $725.5 million, well ahead of the $701.1 million consensus. Growth in the US fueled the business, up 44% to $499 million, with the US commercial segment driving revenue up 54% to $179 million.

Unlike many of its software peers, Palantir is also highly profitable, with a GAAP operating margin of 16% and an adjusted operating margin of 38%. Its adjusted earnings per share rose from $0.07 to $0.10, ahead of the consensus of $0.09.

The company also raised its full-year revenue guidance from $2.74 billion-$2.75 billion to $2.805 billion-$2.809 billion. The third-quarter results represented Palantir’s fifth straight quarter of accelerating revenue growth, an impressive feat even amid the excitement surrounding artificial intelligence.

The silhouette of a bull on a ridge. — Image source: Getty Images.

If there was a reason to be skeptical of Palantir stock coming into its report, it appears to be its valuation. As Palantir has soared this year, so has its multiple.

In the earnings report, Palantir was trading at a sky-high price-to-sales ratio of 40. That kind of valuation typically doesn’t end well, but the AI-powered software stock continues to defy the odds with accelerating revenue growth and increasing profitability.

Palantir’s model also bodes well for future growth as it has already built its AI platform and the marginal cost of rolling it out to new customers is minimal. In the third quarter, sales and marketing, its largest individual line-item expense, rose 19%, and total operating expenses rose just 14%, helping the company’s GAAP operating income nearly triple.

The margin-expanding pattern looks set to continue as interest in artificial intelligence builds, and Palantir’s entrenched government relationships and applications in industries such as healthcare, manufacturing and insurance give it an advantage.

The company has been early to integrate with major language models, but CEO Alex Karp argued that LLMs are effectively a commodity, and what makes the company special is that it allows businesses and government agencies to run LLMs ‘is using their data. In addition, Palantir says it has already built the AI applications to allow its customers to take advantage of the new large language models. Management also noted that the cost of AI conclusion has dropped sharply, which should encourage more companies to adopt Palantir’s AI tools.

With a turnover of $3 billion, Palantir is still overshadowed by established software companies such as Microsoft and Salesforce. However, the company predicted a total addressable market of $119 billion at the time of its IPO in 2020, and it is likely to be significantly larger today due to the rise of generative AI.

Given the company’s accelerating revenue growth, unique product portfolio, and competitive advantage in artificial intelligence, Palantir looks set to capture more of the addressable market, as it currently holds less than 3% of it.

In other words, given the size of TAM and its current momentum, it’s reasonable to expect the company to double, triple, or even grow its revenue by 10x over the long term.

If it can continue down that path, the stock will continue to move higher. While it might seem easy to be skeptical of Palantir after its rise this year and lofty valuations, the company just proved why it’s a winner.

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Jeremy Bowman has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, Palantir Technologies and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has one disclosure policy.

Palantir just crushed estimates again. How high can the stock go? was originally published by The Motley Fool