Palantir (NYSE:PLTR) stock is a company to watch as it heads into its earnings season for the third quarter. My recommendation for investors to hold this stock. Palantir stock continues to show strong revenue growth. I have concerns about the firm’s valuation and its ability to improve profitability.
The third quarter will be an important milestone for Palantir investors for a few reasons. Q3 will provide insight into whether Palantir can maintain or accelerate its recent revenue growth, and it will serve as a broader demonstration of its AIP product.
Furthermore, Palantir’s partnership with Microsoft (NASDAQ:MSFT) will be the first full quarter where the impact of this partnership might be visible in Palantir’s results.
Strong Revenue Growth and Product Adoption
Palantir’s revenue growth has been on an upward trajectory, with Q1 2024 showing a 21% year-over-year increase to $634 million. As stated previously, this acceleration was primarily because of the demand shown for its AIP platform.
The management’s confidence in AIP’s expansion into international and government sectors adds to the optimism for sustained growth in the upcoming quarters, with it being described as being “unprecedented.”
For this year, analysts have given Palantir stock very bullish forecasts for its EPS and revenue. These metrics are expected to soar 275% and 23.77%, respectively.
However, it should be noted that because of the recent run-up in its stock price over the past five days, it has overshot its consensus price target of $23.29 by 23.36%.
There could be some substantial downside for the stock in the short-term as it trades in overvalued territory.
Strategic Partnerships and Market Position
A bullish factor working in the favor of Palantir stock is its partnership with Microsoft to integrate AI and cloud capabilities for U.S. government agencies. This draws Microsoft’s Azure Cloud and Palantir’s AI Platforms together.
This deal should not be underestimated, with Dan Ives, an analyst at Wedbush commenting courtesy of The Street:
“With this marquee deal solidified and Microsoft leveraging Palantir for AI and [large language model] capabilities to the U.S. government, the company can now increase the pace of AI implementation while Palantir continues to accelerate AIP adoption within the federal sector.”
The third quarter will be essential for investors to assess the viability of these partnerships and to justify its frothy valuation.
By one measure, the partnership has already proven fruitful. Palantir secured a $480 million contract with the U.S. Army to implement its AI systems through the Maven Smart System prototype.
It was described as being “an artificial intelligence-enabled solution capable of scanning and identifying enemy systems in any area of responsibility.
Seeing incremental progress with these partnerships will be vital in order to grapple with the high valuation of Palantir stock.
Valuation Concerns
Palantir stock trades at a very high trailing earnings at 159.20x. Some of this has to do with the high run-up in its stock price. On a forward measure, that drops to 90x, and keep in mind that its EPS is expected to rise 275.13% this year.
Those are some very high expectations that could already be priced into its stock price. I therefore find it unlikely that there is much upside left in the company. However, the options market doesn’t see it this way in the short-term.
The company has a put-to call ratio of 0.37 for options expiring in two and nine days. However, that bullishness enters in a neutral territory for options expiring in 16 days.
This is more of a case of traders making speculative bets on the momentum of Palantir stock in the short-term than a signal for long-term investors to enter.
I therefore rate Palantir stock as a hold while the market agrees on its fair value.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.