Is Palantir Technologies Stock a Buy Now?

Palantir's (PLTR 0.44%) stock price sank 5% on Aug. 8 in response to the release of the company's second-quarter report. The data mining firm's revenue rose 13% year over year to $533 million. It generated an adjusted net profit of $120 million, compared to an adjusted net loss of $21 million a year earlier, which trickled down to an adjusted profit of $0.05 per share. Its top- and bottom-line figures both matched Wall Street's expectations.

On a generally accepted accounting principles (GAAP) basis, Palantir posted a net profit of $28 million, compared to a net loss of $179 million a year earlier, and achieved its third consecutive quarter of GAAP profitability. Those headline numbers were solid, but Palantir's stock had already rallied 180% year-to-date ahead of its second-quarter report -- so the bulls might have been expecting a much bigger earnings beat.

Should investors buy Palantir's stock after its post-earnings pullback?

Image source: Getty Images.

Reviewing the key facts and figures

Palantir helps its clients make data-driven decisions by collecting and crunching large amounts of data from disparate sources. Its Gotham platform mainly serves government agencies -- including the CIA, FBI, and U.S. military -- while its Foundry platform services large companies. After it went public via a direct listing in September 2020, Palantir claimed it could grow its annual revenue by at least 30% annually through 2025.

Its growth rates initially supported that bullish outlook: Its revenue rose 47% in 2020 and 41% in 2021. But in 2022, Palantir's revenue only rose 24% to $1.91 billion, and it stopped reiterating its long-term outlook for 30% growth. That slowdown was mainly caused by the macro headwinds that forced companies to rein in their software spending.

During its latest quarter, Palantir generated 57% of its revenue from government clients and the remaining 43% from commercial clients. Over the past year, its government business grew at a stable rate as it secured new contracts and expanded its existing deals, but its commercial slowdown offset a lot of that progress.

Data source: Palantir. YOY = Year over year.

Palantir expects that pressure to persist for the rest of the year. For the third quarter, it expects its revenue to rise 16%-17% year over year. For the full year, it expects its revenue to grow at least 16% to $2.21 billion.

The company believes its near-term growth will be driven by the strength of its U.S. commercial business, which grew 20% year over year in the second quarter and outpaced the segment's slower overseas growth, as well as the gradual recovery of its U.S. government business, which dealt with the "lumpy" timing of new contracts throughout the first half of 2023.

But over the long term, Palantir believes the secular expansion of the AI market will drive its growth in two ways. First, its new Palantir AI Platform, which was introduced in June, will help its enterprise customers build new AI apps and analyze more data through large language models. Second, the company believes government agencies will scramble to upgrade their AI capabilities to counter a new generation of AI-powered cyberweapons.

Focusing on the factors it can control

Palantir's near-term outlook might disappoint investors who had expected a quick reacceleration to more than 30% growth. But for now, Palantir is more interested in expanding its margins, increasing its free cash flow (FCF), stabilizing its stock-based compensation (SBC) expenses, and growing its GAAP profits.

Its tighter spending boosted its adjusted operating margin by two percentage points year over year and one percentage point sequentially to 25% in the second quarter. Its adjusted FCF margin nearly tripled from 10% in the first half of 2022 to 27% in the first half of 2023, which gave it the confidence to authorize a new $1 billion buyback plan. Its SBC expenses still consumed 21% of its revenue in the second quarter, but that marked a big reduction from 31% of its revenue a year ago.

During the conference call, CFO Dave Glazer reaffirmed Palantir's "expectation of GAAP profitability in each quarter of this year," which would make the company "eligible for inclusion in the S&P 500 following our Q3 results."

But Palantir is still priced like a hypergrowth stock

Palantir is still growing and its profits are rising, but it still trades at nearly 80 times its forward-adjusted earnings and 16 times this year's sales. Its commercial peer Alteryx, which is growing at a similar rate this year, trades at about 60 times forward earnings and two times this year's sales. Therefore, I believe Palantir's valuations -- which were likely inflated by the broader rally in AI and other tech stocks this year -- are still too high. This volatile stock could easily be cut in half before it doubles, so investors should avoid it until its valuations cool off again.