Key Points
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Palantir’s recent third-quarter report arrived with strong sales and earnings growth, but its stock has lost ground.
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The company has historically bounced back from sell-offs, but past performance does not guarantee future results.
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Palantir Technologies‘ (NASDAQ: PLTR) strong business results have supported significant valuation gains for the stock. The third quarter saw the company’s revenue increase 96% year over year to $2.31 billion, and its net income surged 137% from the prior-year period to roughly $1.13 billion.
Despite the strong overall results, the company’s stock has pulled back in subsequent trading due to concerns about slowing growth in commercial contract values, slower expansion in international markets, and bearish pressure on companies in the broader artificial intelligence (AI) space.
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Palantir stock is down roughly 1% year to date, and the company’s share price is down 16% from the lifetime high it reached last month. What does history suggest happens next for the stock?
Palantir has a fantastic track record when it comes to beating expectations
In its recent quarterly report, Palantir guided for sales between $2.649 billion and $2.653 billion in the current quarter. Meanwhile, non-GAAP (generally accepted accounting principles) adjusted operating income is projected to be between $1.64 billion and $1.644 billion.
The company has built a very strong track record of surpassing its own guidance and Wall Street estimates, and this outperformance has generally helped generate wins for investors who bought Palantir stock and took a buy-and-hold approach.
Of course, investors have to keep in mind that past performance does not dictate future results. While Palantir has been a publicly traded company for a little over six years, that’s still a relatively short period in the grand scheme of things.
The company has gone through periods when sentiment toward tech stocks turned negative. Still, its overall history as a publicly traded company has been characterized by a sector valuation backdrop that has generally been very favorable. For context, the S&P 500 is up roughly 125% since Palantir went public, and the even more tech-heavy Nasdaq Composite is up 127% over the same period.
Palantir looks poised to continue delivering results that could support substantial valuation gains. The company is growing sales at a highly impressive clip, and its asset-light software business is serving up margins that are nothing short of incredible. Thus far, the incredible margin strength has also shown a high degree of sustainability.
On the other hand, it’s important to understand that Palantir will not be immune to broader market pressures, even if overall business performance remains quite robust. Investors who follow the market actively are almost certainly aware of concerns that valuations for AI stocks are in a bubble, as well as a slew of macroeconomic risk factors, including relatively high inflation, elevated bond yields, and other dynamics that threaten bullish momentum.
PLTR PE Ratio (Forward) data by YCharts
Trading at roughly 109 times this year’s expected earnings and 51 times expected sales, Palantir’s heavily growth-dependent valuation profile comes with substantial risk. However, the company is a clear category leader in vital corners of the AI software market — and there’s a good chance that long-term investors will score wins with the stock even if near-term market pressures roil the market.
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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
