Palantir is Seeing Unprecedented Demand for Artificial Intelligence (AI). Why is the Stock Down? - Latest Global News

Palantir is Seeing Unprecedented Demand for Artificial Intelligence (AI). Why is the Stock Down?

Sometimes it doesn’t seem to matter what a company does in a quarter: the stock will still sell after its report. That’s where Palantir (NYSE:PLTR) found themselves. After investors pushed up the stock ahead of its May 6 earnings report, Palantir shares fell 15% after the company reported its earnings. Even after a small rebound, Palantir is 8% below its price before earnings.

So is this a buying opportunity?

Palantir’s new AI product drives major commercial growth

Palantir is considered a leader in artificial intelligence (AI) as the company has a relatively long history with the technology. With the new wave of AI focusing on generative AI, Palantir has also left its mark.

The Palantir Artificial Intelligence Platform (AIP), which gives customers the tools to integrate AI products across the enterprise, is the talk of the town: Management said demand for it was unlike anything the company had ever seen have.

AIP has been a key driver of the growth of its commercial business, particularly in the US. In the first quarter, U.S. commercial revenue grew 40% year-over-year, but that was slower than the 70% growth Palantir posted in the fourth quarter. Since this segment is a core part of Palantir’s growth thesis, it’s possible that the slowdown spooked investors and caused some to sell the stock.

But selling now would be a big mistake since Palantir is doing well overall.

Palantir stock is still expensive

Overall, Palantir’s revenue rose 21% year-over-year to $634 million, exceeding management’s high-end guidance of $616 million. Management also increased its 2024 guidance range – previously $2.652 billion to $2.668 billion – to $2.677 billion to $2.689 billion.

In summary, the first quarter was a classic beat-and-raise quarter that is typically welcomed by investors.

Palantir’s profitability is also growing – its profit margin of nearly 17% was an all-time high.

PLTR profit margin chart (quarterly).

PLTR profit margin chart (quarterly).

This shows that Palantir is not just a company that grows at any cost. Instead, management uses the current environment responsibly.

But even the best company’s shares bought at the wrong price can become a bad investment.

Based on its forward price-to-earnings (P/E) ratio of 66, Palantir appears expensive. However, it’s not entirely fair to measure Palantir by this standard, as the company hasn’t reached the level of profitability of other software companies. More mature software companies like Adobe can achieve quarterly profit margins in the 30% range.

However, the price-to-sales (P/S) ratio of 22 is expensive regardless of how fast the company grows.

PLTR horsepower ratio chartPLTR horsepower ratio chart

PLTR horsepower ratio chart

This is a red flag to me because it shows that Palantir stock is still quite expensive, even after the overall 17% share price decline following the earnings report. Palantir can (and probably will) be a successful AI company that will see strong growth over the next few years. However, the price investors now have to pay for the stock is worrying. Investors who buy in at this level may not make much money from Palantir in the next few years.

At these prices I’m not a buyer. I would have to lower the valuation even further before I would be willing to buy some shares.

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Keithen Drury has held positions at Adobe. The Motley Fool holds positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.

Palantir is seeing unprecedented demand for artificial intelligence (AI). Why is the stock down? was originally published by The Motley Fool

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