Palantir (PLTR 0.53%) is one of the most watched AI stocks on the market. It has massive popularity, but has struggled this year.
While most of the AI segment of the stock market has rallied in recent weeks, Palantir's stock continues to fall and is now down 35% from its all-time high. However, on May 5, Palantir will have a sizable announcement that will likely trigger a sizable move in its stock: quarterly earnings.
While quarterly earnings reports sound like a boring event, it's one of the few updates investors get from companies each year, and the information inside has the power to dramatically move the stock price in either direction. So, the question is, will it be a dramatic move up or down? Let's find out.
Image source: The Motley Fool.
Palantir's business is booming
To say Palantir has been crushing it lately is an understatement. Palantir's AI-powered data analytics platform has grown in popularity since the AI revolution began. Originally, Palantir started off tailoring its platform for government use, and it was heavily deployed by defense and intelligence agencies. The company eventually expanded to other government use cases before hitting the commercial market. Palantir has a fairly even split between commercial and government revenue, so continued success of both client bases is key to its future.
NASDAQ: PLTR
Key Data Points
The Iran war highlighted the use of Palantir's software, as it helped with wartime planning decisions that would have been nearly impossible to make without the use of AI technology. Its usefulness secured its use in the government space for years to come. With its rapid growth inside the commercial sector, I think it's safe to say that many businesses are starting to build their capabilities around Palantir's software.
During the fourth quarter, Palantir's revenue soared 70% year over year. U.S. clients showed the biggest growth, with U.S. commercial sales increasing 137% year over year and U.S. government revenue rising 66% year over year. Those are solid growth figures and showcase Palantir's impressive capabilities. Palantir is also fully profitable, and reported a 43% net income margin -- a level that would make countless companies jealous.
Over the next few quarters, Wall Street analysts expect 74% growth in Q1 and 67% in Q2. That shows continued expansion, which could send the stock flying back toward all-time highs, but there could be one problem: valuation.
Palantir's valuation is suspect
Despite Palantir falling around 35% from its all-time high, the stock is still incredibly expensive.
PLTR PE Ratio data by YCharts
Palantir recently traded for 214 times trailing earnings and 103 times forward earnings. This indicates that the market believes Palantir can double its earnings in 2026. However, even fast-growing stocks with impressive margins trade for a much lower premium than 100 times earnings, and I think a more reasonable long-term target would be about 30 to 40 times earnings.
For Palantir to reach that level, it would need to double its earnings in 2026, 2027, and nearly again in 2028. That's a lot of growth for a company to undergo, and it makes investors like me nervous that I must pay for three years of growth in advance so I can then benefit from what the company does in 2029 and beyond. With the rise of other generative AI technologies that can provide similar capabilities to Palantir at lower price points, the investment thesis of Palantir is starting to come under fire. As a result, the stock is selling off to a more reasonable level to adjust for the growing risk of competition.
Unless Palantir comes out with a truly incredible quarter that dramatically outperforms expectations and raises future growth assumptions, I think its stock is expected to undergo a deeper sell-off following Q1 earnings on May 5. As a result, I think investors need to stay patient and not rush in to buy the stock now just because it's down from its all-time high.
