Palantir (PLTR) was the standout AI winner for the June quarter, with shares jumping double digits after stellar results. The company surpassed expectations on key metrics and showcased strong AI momentum despite market doubts. This momentum, in my view, outweighs valuation concerns and supports my bullish outlook on the stock. The impressive performance of Palantir during this period reinforces my confidence that the company is well-positioned to capitalize on AI advancements, which is critical in justifying a bullish outlook.
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While short-term volatility may impact PLTR shares, the long-term growth story remains strong. In this article, I’ll discuss why there’s still potential for bullishness in the investment thesis, even with the stock trading near its all-time highs.
Palantir’s Blowout Q2 Earnings
Palantir’s strong Q2 earnings support the bullish thesis by demonstrating the company’s ability to consistently exceed expectations and sustain growth momentum. The June quarter marked very solid results for the Denver-based software company. Palantir reported top-line results of $678 million, surprising experts by nearly 4% and marking a 27% increase compared to the same quarter last year. This robust revenue growth is a key factor supporting my bullish outlook
Moreover, this revenue growth came not only from government contracts, which were up 24% year-over-year, but also from the commercial side of the business, which saw a remarkable 55% increase. Additionally, Palantir closed 27 deals over $10 million and increased its client base by 41% in the quarter. These achievements showcase Palantir’s diversified growth strategy and its ability to secure significant contracts across both public and private sectors, which is crucial for long-term growth and aligns with the bullish outlook.
On the profitability front, Palantir’s continued ability to exceed estimates bolsters the bullish view by demonstrating strong financial management and operational efficiency. Palantir reported its fourth consecutive quarter of exceeding estimates, this time by a single cent. It’s noteworthy that earnings per share were just a penny a year earlier, demonstrating an impressive 80% growth in one year. This consistent profitability growth is a vital part of the bullish thesis, as it strengthens the company’s financial foundation and justifies its premium valuation.
Furthermore, Palantir achieved an income margin of 37%, continuing its trend of increasing profitability. A significant highlight of Palantir’s Q2 earnings was the 83% growth in U.S. commercial clients, reflecting the company’s strong penetration in the U.S. market.
As investors debate how and when the company’s investment in AI will pay off, Palantir has delivered another strong quarter across the board. CEO Alex Karp emphasized the importance of profitability and revenue growth for the company’s narrative, stating, “a single most important number for our Palantir narrative, we’re profitable and the revenue’s going up.”
Furthermore, Palantir’s raised guidance for Q3 and the full year underscores management’s confidence in sustained growth, supporting the bullish sentiment. The company now expects Q3 revenues between $697 million and $701 million, and full-year revenues between $2.742 billion and $2.750 billion, increasing its guidance by $63 million at the midpoint. This upward revision in guidance is a strong indicator of management’s confidence in continued growth, further bolstering the bullish outlook on the stock. This implies an annual growth rate of 23%, up from the previous estimate of 21%.
Why It’s Not Too Late to Invest in Palantir
Despite Palantir’s recent stock surge, the bullish view holds that the company’s growth prospects still offer substantial upside potential. After Palantir’s Q2 earnings report, the stock climbed above $30 per share, hitting its highest point this year. But it’s still shy of its all-time high of over $39 per share, which it reached back in January 2021 during a period of intense market volatility. This recent price movement, coupled with the company’s improved financial health, supports the sentiment that there is still upside potential, making it not too late for investors to consider joining the ride.
A lot has changed since then. While the excitement around Palantir is fueled by its impressive growth and strong financials, the stock’s valuation remains debatable. With a forward P/E ratio of about 82x, Palantir’s valuation might seem alarmingly high. However, this doesn’t necessarily mean the stock is overvalued.
In 2021, Palantir’s stock was arguably overvalued, even by its own management’s standards. The company significantly diluted its shares—by around 200%—from mid-2020 to now. This dilution negatively impacted the stock’s price performance in the following years, but it also allowed Palantir to raise capital, reduce debt, and improve liquidity.
Today, Palantir’s financial situation is much improved. During the Q2 earnings call, CEO Alex Karp highlighted the Rule of 40, a metric used by software companies to evaluate profitability and investment potential. According to this rule, a company’s growth rate plus its profit margin should total at least 40%. In the first quarter, Palantir exceeded this benchmark, with combined revenue growth and an adjusted operating margin reaching 64%, up seven points from the previous quarter.
This financial strength underscores Palantir’s competitive edge, even among large-cap tech stocks. Its software, especially in defense contracting, tackles complex, high-risk problems that competitors often avoid. Palantir excels like no other player in customized security solutions, including advanced encryption to protect sensitive data.
With ongoing advancements in AI, Palantir continues to be well-positioned in the commercial sphere, while competitors may take years to achieve similar capabilities.
That said, this strong position comes at a premium. Projections suggest it might take four to five years for Palantir to trade at a multiple below 45x earnings. Still, this concern is somewhat eased by the company’s solid growth momentum, which shows no signs of slowing down.
Why Is Wall Street So Divided Regarding Palantir?
When examining Wall Street’s consensus on Palantir, it’s clear that analysts are highly divided.
Currently, of the fourteen analysts covering the stock, only three are bullish, while the rest are either neutral or bearish, resulting in a “hold” consensus. The range of ratings is notably broad, from $9 per share to $35, with an average price target of $22.42. This suggests a potential downside of up to nearly 70% and an upside of almost 20%, based on PLTR’s share price at the time of writing.
This split in opinion can be attributed to several factors, in my opinion. Firstly, some analysts may be experiencing regret after missing out on substantial gains from Palantir’s past rallies, leading to skepticism over its stretched valuations.
Palantir’s unique business model—integrating software, data analytics, military defense, and AI—creates a complex investment thesis. High insider sales and significant past share dilution have deterred many institutional investors. Currently, about 28% of Palantir’s shares are held by institutions, while the company also has a strong popularity among retail investors, resembling a “meme stock” fan base.
This dynamic may shift if Palantir is added to the S&P 500 (NYSEARCA:SPY) in the near future. Such an inclusion could attract more institutional investors and act as a catalyst for the stock to gain stronger favor on Wall Street.
Key Takeaways
Palantir has done what the Magnificent 7 haven’t this earnings season: it has shown a strong acceleration in both revenue and profitability, exceeding expectations. This indicates that the growth story is improving over time, and its guidance suggests this trend will likely continue.
At current valuations, Palantir appears to be a high-risk, high-reward investment in the short term. Disclosure
