From Tolkien to S&P 500: Palantir’s Data Magic Conquers Wall Street

In a world drowning in data, Palantir Technologies (PLTR) throws a high-tech lifeline. 

This data analytics juggernaut, named after Tolkien’s all-seeing orbs, isn’t just riding the AI wave – it’s creating tsunamis. 

From its roots as a government agency darling to its current status as a commercial sector superstar, Palantir has morphed into a force that’s reshaping how organizations harness the power of information. 

With its recent addition to the S&P 500 Index and jaw-dropping Q2 2024 results, Palantir has financial pros actively searching the stock, according to our TrackStar data.

But at over 100x earnings and cash flow, is it too expensive to own?

Palantir’s Business

Born in 2003, Palantir has morphed from a government agency darling to a commercial sector superstar. 

Its trio of platforms – Gotham, Foundry, and Apollo – slice through data complexity like a hot knife through butter. Now, with its AI-powered AIP platform, Palantir is upping the ante in the high-stakes world of artificial intelligence.

Palantir segments its business into two powerhouse areas:

• Government (54% of total revenues) – Equipping defense, intelligence, and civilian agencies with razor-sharp data solutions.
• Commercial (46% of total revenues) – Arming private sector titans with game-changing data platforms.

Palantir’s Q2 2024 results sent shockwaves through Wall Street. Revenue skyrocketed 27% year-over-year to a jaw-dropping $678.1 million, marking its fourth straight quarter of GAAP profitability. 

However, that didn’t hold a candle to the news of Palantir’s impending addition to the S&P 500 Index, replacing American Airlines Group. This corporate equivalent of making it to the big leagues sent Palantir’s stock soaring 7% in after-hours trading.

In the U.S. commercial market, Palantir’s growth is stratospheric. Revenue surged 55% year-over-year, hitting $159 million in Q2 2024. 

Customer count in this sector exploded by 83%, from 161 to 295 in just a year. Meanwhile, U.S. government revenue crossed the $1 billion mark for the first time in a trailing twelve-month period.

Palantir’s AIP platform, launched just over a year ago, is already transforming the business landscape. It’s not just another AI tool – it’s a bridge between large language models and an organization’s proprietary data and operations. 

This approach allows businesses to leverage AI within existing workflows while maintaining ironclad security over sensitive information.

Financials

Source: Stock Analysis

When Palantir went public in late 2020, it had excellent sales growth. However, it wasn’t until 2023 that the company made a profit, though it was a positive free cash flow in 2021.

Since then, sales have steadily risen ~20% per year and are expected to continue at that rate for the foreseeable future.

Recently, profit margins have climbed to 16% as free cash flow margins hold close to 30%.

With barely any CAPEX or debt, Palantir has accumulated nearly $4 billion in cash, growing by almost $600 million annually.

Valuation

Source: Seeking Alpha

Palantir isn’t a cheap stock when measured on a price-to-earnings or cash-flow basis.

At over 100x on each, it’s 3x-5x more expensive than Microsoft (MSFT), Salesforce (CRM), IBM (IBM), and Oracle (ORCL).

The question is whether Palantir’s growth justifies these multiples.

Growth

Source: Seeking Alpha

With sales of just $2.5 billion, there is plenty of runway for the company. And so far, it’s done an excellent job improving revenues by 20% every year.

So long as it maintains its profitability, it will eventually catch up in valuation to its peers.

Yet, it’s worth pointing out that high growth is becoming a staple, as Microsoft and Salesforce illustrate.

Profitability

Source: Seeking Alpha

Palantir’s profit margins are still improving. Some of it is simply stock awards dragging it down, which will eventually dissipate.

The key here is the free cash flow margin, which is excellent but could be improved to get closer to 30%.

Our Opinion 8/10

Palantir is expensive after its latest run. Investors expect substantial growth from the company.

So long as they deliver, then everything will be fine.

However, if you’re not already in a position, it’s probably best to wait for a pullback instead of trying to jump in here, even if you have a long-term outlook.

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