Palantir stock (New York Stock Exchange: Beltr) decreased by about 16% after that First quarter earnings reportWhich got me thinking about whether this downturn represents a buying opportunity. Notably, Palantir demonstrated another quarter of strong revenue growth, promising customer base expansion, and strong profitability metrics. However, concerns remain about the stock's high valuation. Thus, although I believe in Palantir's long-term prospects as a shareholder, I maintain a neutral stance on the stock at the moment and do not think the dip is worth buying.
Accelerating growth driven by government and commercial customers
Palantir's first quarter saw a period of accelerated growth, driven by strong performance in both the company's government and commercial segments. Revenue was $634.4 million, up 20.8% year over year. This means last year's growth accelerated by 17.7% and the third consecutive quarter of accelerating revenue growth on a sequential basis. Let's take a deeper look at both Palantir divisions in the first quarter to better understand the exact reason behind this result.
Government revenues are supported by domestic acceleration and international expansion
Starting with Palantir's government segment, which represented approximately 53% of Q1 revenue mix, total revenue growth in this segment was 16% at $335 million. This growth was mainly driven by revenue acceleration in the domestic division and rapid international expansion.
Domestically, revenue growth accelerated in the first quarter for the US Government business, increasing 12% year-over-year and 8% quarter-over-quarter to $257 million. This compares to a 3% QoQ increase in Q4, with Palantir software becoming increasingly important to the US government in today's unstable geopolitical environment. Palantir's international government division drove growth in the segment, with revenues rising 33% to $79 million.
An important milestone in the first quarter was that the US Army awarded Palantir an exclusive prime contract worth more than $178.4 million to develop a next-generation targeting node as part of the TITAN program. This represents a historic moment for Palantir, as it became the first software company ever to win a major hardware system contract. This effectively enables Palantir to establish itself as a major vendor similar to giants like Lockheed Martin (New York Stock Exchange: LMT(or Northrop Grumman)New York Stock Exchange: NOC) in the field of weapons and space products.
High business revenues after rapid expansion of customer base
Turning to Palantir's commercial segment, revenues saw another notable uptick, driven by increased uptake of its AI platform (AIP) and strong expansion of the company's clients.
in Advance update on PalantirShe emphasized the pivotal role bootcamps play in strengthening Palantir's customer base. Palantir organizes these hands-on workshops to showcase the capabilities of its software, particularly its AIP. Successful demos should allow potential customers to understand Palantir's value proposition and potentially commit to a contract.
This strategy seems to be working very well for the company. In the first quarter, Palantir added 41 new customers in its U.S. commercial segment (see image below). This represents a 69% increase in Palantir's customer count year over year and 19% increase quarter over quarter. Palantir also posted a significant acceleration here, compared to 8% quarterly growth in the first quarter of last year.
Profitability has improved rapidly, but valuation concerns remain
Palantir's strong revenue growth has gradually allowed the company to record an improvement in unit economics, thereby improving profitability metrics. The company's adjusted operating margin reached 36%, up from 34% in the prior quarter and 24% a year ago, representing the sixth consecutive quarter of expansion. This resulted in adjusted operating income of $226.5 million, an increase of 81% compared to last year. Furthermore, Palantir's adjusted free cash flow came in at $149 million, also achieving a noteworthy margin of 23%.
With additional cash flowing to Palantir's balance sheet, the company finished the quarter with a record cash position of $3.87 billion, all while maintaining debt-free status. However, investors should still take into account the fundamental risks involved in Palantir's current valuation, no matter how impressive its profitability metrics and strong financial standing are.
At the end of the day, Palantir still trades at roughly 65 times this year's expected earnings per share (EPS) and 54 times next year's expected EPS. Accelerating revenue growth and continued margin expansion may allow the company to grow to these multiples sooner rather than later. However, Palantir's investment case offers a significantly lower margin of safety compared to last year's levels, even after the post-earnings decline – and this is coming from a shareholder with high hopes.
Is PLTR stock a buy, according to analysts?
Current sentiment on Wall Street looks bearish, even after Palantir's stock price fell post-earnings. According to Wall Street, Palantir Technologies has a Moderate Sell consensus rating based on two buys, five holds, and six sells in the past three months. At $19.67 on average PLTR stock price target It indicates a downside probability of 4.5%.
If you're wondering which analyst you should follow if you want to buy and sell PLTR stock, the most profitable analyst covering the stock (on a one-year time frame) is Mariana Perez of Bank of America (New York Stock Exchange: PAC) securities, with an average return of 61.42% per classification and a success rate of 92%. Click on the image below to learn more.
Ready meals
In summary, Palantir's first-quarter report reflects a continued acceleration in revenue growth, evident in both the government and commercial sectors. As governments increasingly rely on Palantir's software during an unstable geopolitical environment and enterprise customers gradually realize the capabilities of AIP, Palantir's long-term prospects look more promising than ever.
However, the ongoing concern about the stock's valuation cannot be overlooked. While Palantir looks promising for long-term investors, of which I am one, a neutral stance on the stock seems reasonable, given its high valuation multiple. Accordingly, I would not buy the stock at this low if I were looking to initiate a position in Palantir. Better wait until you reach a more attractive entry point.