Palantir Technologies (PLTR) has been on a rollercoaster ride for investors, with its stock price plummeting 38% from its 52-week high of $207.52. But amidst the turmoil, a recent Wall Street upgrade has sparked a debate: is it time to buy back in? The argument for a buy rating is compelling, as earnings have finally caught up with the price. However, a closer look reveals a more nuanced picture, and I believe shares are closer to a hold than a buy. Let's delve into the details and explore why.
The Case for a Buy Rating
The upgrade is based on the idea that Palantir's earnings have finally caught up with its valuation. In the past year, the company has transformed from a $0.08 per quarter earner to a $0.34 earner. This impressive growth is further supported by a 85% year-over-year revenue increase in the first quarter, with U.S. commercial revenue soaring 133%. Forward indicators also point in the right direction, with 206 deals of at least $1 million closed during the quarter and a total contract value of $2.41 billion, up 61% year-over-year.
Palantir's profits have arguably been even more impressive than its top-line growth. The company achieved a 53% profit margin and an earnings per share of $0.34. Adjusted free cash flow ran $925 million, and the balance sheet carries $8 billion in cash and short-term Treasuries. These numbers are impressive, and they suggest that Palantir is a company that can achieve unbelievable growth rates.
The Nuanced Picture
However, a closer look reveals a more nuanced picture. While Palantir's growth is impressive, it's important to consider the context. The company is already a large software company, with a market value of about $310 billion. This means that the era of easy doublings is probably behind it. Additionally, government spending cycles can change, and competition in artificial intelligence (AI) software is arriving from every direction.
The Risks
One of the biggest risks is the potential for growth to unexpectedly slow. With the stock trading at a valuation of 86 times forward earnings, the downside risk is significant. Another risk is the size constraint. At a market value of about $310 billion, Palantir already ranks among the largest software companies in the world, which means that the company may not be able to maintain its current growth rates.
My Perspective
In my opinion, the current valuation of 86 times forward earnings might sound difficult to justify on the surface. However, I believe that Palantir's extraordinary underlying business growth may already fully justify a valuation like this. But I'd like to see a bigger margin of safety before I buy the stock. A price meaningfully below my estimate of the stock's intrinsic value would be ideal, so that if things go worse than expected, shares could still perform decently.
The Bottom Line
In conclusion, while the case for a buy rating is compelling, I believe that shares are closer to a hold than a buy. The company's growth is impressive, but the risks are significant. I'd like to see a bigger margin of safety before I buy the stock, so I'll be watching closely to see if the price drops further. For now, I'm taking a wait-and-see approach, but I'm optimistic about the company's long-term prospects.
