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The growing investment in artificial intelligence (AI) infrastructure and the deployment of the technology across various industries has propelled shares of companies in the AI space to new highs. Palantir Technologies (PLTR), one of the top performers in this sector, has experienced impressive growth. Year-to-date, Palantir's stock has soared by 161.7%, and over the past 52 weeks, its shares have climbed nearly 200%.
The rapid ascent of Palantir's stock is largely fueled by the strong demand for its AI Platform (AIP), which continues to attract a growing number of clients and drive revenue gains. Over the past several quarters, Palantir’s revenue growth has consistently accelerated, benefiting from the higher adoption of AI in the enterprise software segment. Additionally, Palantir has achieved this notable revenue expansion while increasing its adjusted operating margin, reflecting the company’s solid underlying unit economics.
Despite the excitement surrounding Palantir's prospects in AI, Wall Street analysts are cautious about PLTR stock ahead of its third-quarter (Q3) earnings report, and see significant downside potential. Let’s explore the factors that could impact Palantir’s Q3 financials and share price.
Palantir: Q3 Earnings Expectations
Palantir will release its Q3 earnings after the close on Monday, Nov. 4. The company’s leadership remains optimistic, and expects the momentum to carry through the third quarter. Palantir’s management forecast Q3 revenue of between $697 million and $701 million, reflecting a year-over-year increase of about 25-26%.
Palantir has shown accelerating revenue growth over the past four quarters. Starting with a 17% increase in Q3 of 2023, the growth rate climbed to 20% in Q4, 21% in Q1 of 2024, and 27% in Q2. Although the Q3 forecast suggests a slight moderation in growth, this outlook may be conservative, given the solid momentum in Palantir’s business - and especially within its U.S. commercial segment.
Palantir’s U.S. commercial business has seen significant traction, primarily due to its AIP, which has been instrumental in attracting new clients and expanding relationships with existing ones. The company’s customer base grew by 41% year-over-year in Q2, reaching 593 clients. This increasing customer base and robust growth from major clients could further fuel revenue growth.
Besides commercial, the company’s government business is also showing solid expansion, led by the strong demand for its government software solutions.
Palantir’s deal pipeline offers a solid foundation for future revenue. As of the end of Q2, Palantir held $4.3 billion in total remaining deal value, marking a 26% year-over-year increase. Additionally, remaining performance obligations (RPO) grew by 41% year-over-year, standing at $1.4 billion. Given the ongoing demand for Palantir’s solutions, including AIP, both these metrics are expected to rise, providing a solid base for future revenue growth.
Given the current strength in Palantir’s business, there’s a chance the company may exceed expectations in Q3, potentially even leading management to revise its full-year revenue guidance. In fact, during Q2, Palantir had already raised its 2024 revenue outlook to between $2.742 billion and $2.750 billion.
Analysts See Downside in Palantir Stock
Despite the strong fundamentals and growth momentum, analysts have maintained a cautious stance on Palantir. The key reason for most lies in its current valuation, which has climbed to levels significantly above its industry peers. Palantir’s year-long rally has left the stock trading at elevated multiples, prompting analysts to issue a “Hold” rating.
Moreover, analysts' average price target of $27.14 indicates a potential downside of nearly 40% from its current price.
The elevated valuation has raised concerns that even a slight revenue miss or slowdown in growth could lead to a sharp correction in the stock price.
The Bottom Line on PLTR Stock
The upcoming Q3 earnings report could set the course for Palantir stock. If the company can sustain its growth and raise its annual guidance, it may alleviate some of its valuation concerns. However, any signs of a slowdown could lead to a significant pullback in the stock price, reflecting analysts’ concerns over its current valuation.
While Palantir’s fundamentals remain strong, and the broader trend of AI adoption is likely to benefit its business, investors should weigh the risks carefully. A high valuation means there’s little margin for error, and the company's ability to meet—and perhaps exceed—market expectations in Q3 could determine whether it can maintain its upward momentum or face a significant reset.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
