Shares of Palantir Technologies (PLTR +13%) have surged to levels not seen since early 2021. The stock's rise follows its inclusion in the S&P 500, announced last Friday. This inclusion comes after Palantir's second consecutive quarter of GAAP profitability in 1Q23 and projections of continued profitability.
We have been bullish on PLTR since late last year, driven by its strong turnaround and the AI buzz. However, the stock has more than doubled YTD, reaching multi-year highs. PLTR now trades at a 27x FY24 sales multiple, significantly higher than peers like Snowflake (SNOW, Financial) at 11x and IBM (IBM, Financial) at 3x.
- PLTR has consistently demonstrated its technological edge in AI, recently delivering another solid beat-and-raise in Q2. Government and commercial revenue continue to grow, with commercial customers increasing by 41% year-over-year to 593. The commercial sector remains a focal point, given PLTR's strong presence within the U.S. Government.
- PLTR has been profitable, expanding its adjusted operating margins by 12 points year-over-year to 37%, marking its seventh consecutive quarter of margin expansion. As a software-centric company, PLTR has ample room to sustain its profitability.
- Europe remains a challenge, impacting international commercial growth, which accounted for just 22% of total revenue in Q2. Earlier this year, PLTR warned of persistent headwinds in Europe due to near-zero GDP growth projections. To counter this, PLTR is expanding rapidly into Asia and the Middle East, achieving a 15% year-over-year growth in international commercial revenue in Q2.
Overall, PLTR is a strong long-term AI investment. Its software stands out among AI-powered data analytic tools and has been adopted by global enterprises like ExxonMobil (XOM, Financial) and United Airlines (UAL, Financial), as well as numerous government agencies, including the U.S. Federal Government. However, given its current valuation, we advise caution in the near term. Any minor issues could trigger significant selling. With substantial capital flowing into the AI sector, customers will soon demand a solid return on investment. Even if PLTR maintains its competitive advantage, a downturn in the AI industry could result in selling pressure on PLTR.
