Did the market just hand you a gift you need to act on before it realizes the mistake? Palantir Technologies (NYSE:PLTR) tumbled after a solid first-quarter earnings report because growth apparently wasn’t high enough to justify its valuation. That doesn’t mean you should stay away from Palantir stock.
While the artificial intelligence stock also offered guidance for the second quarter and full year that was just shy of expectations, Palantir stock dropped 15% on the report. Investors are wondering whether to thank the market for giving them the chance to get into the AI company at a cheaper price or to wait for more “gifts” in the future.
What Have You Done for Me Lately?
Palantir’s first-quarter results showed strong growth. Revenue of $634 million was up 21% year over year and beat Wall Street’s expectations of $625 million. Earnings per share of 8 cents match analyst projections. It was also Palantir’s sixth consecutive quarter of GAAP profitability.
What the market didn’t like was an apparent deceleration in growth of Palantir’s U.S. commercial business, which went from 70% growth last quarter to 40% this time.
The fear is that the company’s Artificial Intelligence Platform isn’t being adopted as fast as previously believed. And for a stock that still goes for 54 times earnings estimates after the drop in price, it was growth that no longer justified the excess premium.
Palantir also raised its full-year guidance to a range of $2.677 billion to $2.689 billion, better than its prior forecast for a range of $2.652 billion to $2.668 billion. However, that wasn’t enough for Wall Street, which was looking for $2.71 billion in revenue.
Similarly, second-quarter guidance of $649 million and $653 million was also a range slightly less than analyst estimates of $653 million.
Not All Is As It Seems
That analysis misses that Palantir’s U.S. commercial revenue still grew 68% in the quarter if you exclude its strategic investments. Those are investments Palantir makes into companies that it then gives access to its products and services.
Admittedly, the fourth quarter also featured such strategic commercial contracts. The 70% growth reported excluded their value, but there doesn’t seem much risk that Palantir’s commercial business is drying up.
It continues to expand to represent a larger percentage of PLTR’s total revenue. Last quarter, government revenue represented 55% of the total but this quarter it was less than 53%.
That’s key because last quarter CEO Alex Karp told investors, “Our U.S. commercial business continues to be a significant driver of our growth, a trend that we expect to continue.”
A Rich Price but Worth It
What the quarter also featured was the government business reigniting growth. Revenue for the segment jumped 16% for the period compared to 11% in the fourth quarter. So government growth is still going strong but business is getting stronger.
Without question, Palantir stock is richly valued. As mentioned, shares go for 54 times estimates, 20 times sales and 74x the free cash flow it generates.
Yet as one of the best pure-plays in artificial intelligence which has such a long runway of growth, perhaps the stock is worth the premium and can grow into the valuation.
Analysts now think Palantir can’t maintain the momentum behind its commercial revenue growth. Even so, it continues to add new customers to its client lists. Its customer count jumped 69% from last year.
I think there is an inflection point approaching for Palantir Technologies. The current dip in stock price puts it at the level it traded at in February. A buy-in now is based on a belief that AI is all it is cracked up to be and PLTR will be a leader in the space going forward.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
