Is Palantir a buy? | The motley fool

One of the hottest stocks this year has been Palantir (PLTR 4.79%). The company’s strong results and inclusion in S&P 500 has helped its stock soar more than 250% this year as of this writing.

Although the stock has been a strong performer this year, the question on many investors’ minds is whether the stock is still a buy after its big gains this year. Let’s take a closer look at both the buy and sell cases for Palantir stock to help you decide.

Accelerating growth is the anchor for the purchase case for Palantir

Palantir has established itself as one of the leading data collection and analytics companies in the world through its work with the US government on such mission-critical tasks as counter-terrorism and tracking COVID-19 cases. However, the company’s Artificial Intelligence Platform (AIP) and its move into the commercial sector are the biggest reasons to be bullish on the stock.

The company has seen its growth in the US commercial sector explode in recent quarters as it continues to add more and more commercial customers attracted by its AI platform and the various use cases it can be used for across industries. Last quarter, Palantir’s U.S. commercial revenue rose 54% to $179 million, and it said AIP saw “relentless demand for artificial intelligence” among those customers. Its US commercial customer count, meanwhile, grew 77% year over year, while its total contract value (TCV) increased 37% to nearly $300 million.

The company has also seen accelerating growth at its largest customer, the US government, which has begun to embrace its AI offerings. US government revenue rose 40% last quarter to $320 million. The company said it is beginning to see all aspects of government, including the White House, Congress, Defense and Intel agencies, begin to embrace the use of large language models (LLMs).

However, the biggest opportunity for Palantir going forward is moving customers from AI prototype work to production. Right now, the company is landing a lot of new customers, but the bigger opportunity will come when it starts expanding within those customers. The company already has a strong net dollar retention rate, which was 118% last quarter. This measures how much revenue came from existing customers who have been with the company for more than a year, minus any customer churn.

However, Palantir’s net dollar holdings do not include growth from customers added within the past 12 months, and this is where the big growth opportunity lies. Palantir has added a lot of new AIP customers over the last year for early AI prototyping work, and the expansion within these newer customers will really give it an opportunity to continue to accelerate its revenue growth going forward. And accelerating revenue growth can lead to a higher share price.

Image source: Getty Images.

Assessment and executive selling anchor the sales case for Palantir

While Palantir has proven to be a great company, whether its stock is a buy is another matter entirely. While large companies typically do not trade at good prices, valuation is still important.

And the valuation is the biggest bank on Palantir’s stock. The stock now trades at a forward price-to-sales (P/S) ratio of about 40 times next year’s analyst estimates. Taking out its net cash and using an enterprise value to sales multiple (EV/S), it still trades at 39 times. At the peak of software-as-a-service (SaaS) valuations, SaaS stocks traded at a multiple of 19.4 EV/S while revenue grew in the low 30% range, just below the growth of 30% that Palantir recorded last quarter.

PLTR PS Ratio (Forward 1y) data of YCharts

Meanwhile, Palantir executives and other insiders also appear to recognize the valuation heights to which the stock has risen, with a number of them offloading shares in recent months, including CEO Alex Karp.

Karp has been a steady seller of Palantir stock in recent years, but he has ramped up his selling since September. Over the past few months, he has exercised options and sold stock on four separate occasions, selling more than 33 million shares for gross proceeds of more than $1.6 billion. Meanwhile, Chairman Peter Thiel sold over $1 billion in shares in September and early October, while several other insiders have also sold shares.

The verdict

In the case of Palantir, I would follow what the company’s executives are doing. It’s a great company, but its valuation is now double what the highest SaaS valuation was just a few years ago, with a similar growth rate.

As such, I would not be a new buyer of the stock, and I believe that investors should at least consider taking some profits in the stock after a very strong run.