The AI and data solutions provider Palantir Technologies (PLTR), is scheduled to report its Q3 earnings on November 4, aiming to sustain its impressive growth trajectory this year. Although momentum in the AI sector remains strong, I have concerns about Palantir’s ability to sustain its rally. Specifically, the company relies heavily on positive annual guidance updates to demonstrate that demand for its software is still robust, which may pose a risk if future updates fall short. Therefore, I believe a neutral stance may be prudent for Palantir ahead of the Q3 report.
Furthermore, although Palantir’s AI growth story is still in its early stages and its fundamentals may ultimately justify its current share price in the coming years, I believe that investors who have purchased shares at these valuations ahead of the Q3 report may be paying overly optimistic multiples.
Before delving into the reasons for my skepticism regarding Palantir’s ability to sustain the impressive bullish momentum, it’s important to highlight the factors contributing to its remarkable triple-digit growth in market value over the past twelve months.
In the last two quarters, Palantir reported revenue growth of 20.8% in Q1 and 27.1% in Q2, with gross profits increasing by 24% and 28%, respectively. This led to a gross profit margin of 81%, surpassing Nvidia’s (NVDA) margin of 75%. Much of this success can be attributed to the expansion of its commercial sector, particularly its AI-powered Foundry and AIP platforms, which grew 55% year-over-year in Q2, compared to a 24% increase in government contracts. CEO Alex Karp noted an ‘unrelenting wave of demand’ for production-ready AI systems, emphasizing Palantir’s unique ability to meet that demand.
Over the past two quarters, Palantir has consistently raised its full-year guidance, primarily driven by strong commercial revenue growth, with yearly growth rate estimates increasing from 45% in Q1 to 47% in Q2. The company also revised its total revenue projections, raising its full-year 2024 estimate from $2.677 to $2.689 billion in Q1 to $2.742 to $2.750 billion in Q2. Additionally, it adjusted its income from operations guidance to $966 to $974 million, up from the Q1 forecast of $868 to $880 million.
While it’s hard to argue against Palantir’s strong performance in the first half of the year, I believe that moving forward, just hitting top estimates won’t be enough to sustain its bullish momentum. With expectations already sky-high for Q3, Palantir faces added pressure. Although I expect the company to surpass those estimates, in my view, an upward revision of its full-year guidance will be essential to maintain the stock’s momentum.
The company provided Q3 revenue guidance of $697 million to $701 million, with Wall Street favoring the high end. All 16 analysts covering the stock have revised their estimates upward, resulting in a consensus of $703.4 million, which would represent a 26% annual growth rate.
Additionally, with adjusted net income guidance of $233 million to $237 million for Q3—suggesting a potential annual increase of 46% at the upper end—Wall Street is forecasting an EPS consensus of $0.09, reflecting a 29.8% annual increase. All analysts have also raised their EPS estimates in the past three months.
As Palantir’s growth story is centered around the massive demand for AI, which is still in its early stages, there is a strong belief that the company will continue to revise its annual guidance upward to better reflect its growth prospects. I think whether this quarter is a hit or a miss will largely hinge on any updates to that full-year guidance. This is because the current projections do not seem sufficient to fully justify Palantir’s lofty valuations, a topic I will explore further.
One of the primary reasons for my skepticism regarding Palantir’s ability to sustain its bullish momentum after the Q3 results is the extremely high valuation multiples at which the company trades.
Currently, Palantir is valued at metrics such as 35 times its forward sales, 120 times its forward earnings, and 135 times its cash flows. This valuation makes Nvidia—arguably the biggest leader in AI—appear relatively discounted by comparison despite being considered an expensive stock and despite Nvidia’s higher growth projections for both revenue and earnings.
The situation is exacerbated by growth estimates that do not seem robust enough to justify such stretched multiples. Palantir’s revenue is projected to grow at a forward rate of 20.4%, surpassing the sector median of 6%. For 2025, revenue is expected to grow by approximately 21.2%, followed by 20% through 2026. EPS growth is forecasted at 42.3% in 2024 with an expected EPS of $0.36, and a more moderate 21.4% in 2025, reaching an estimated $0.43. By 2026, EPS could reach $0.52, indicating growth rates of 42%, 21%, and approximately 19% over the three-year period.
A key bullish argument for Palantir’s valuation is its improved free cash flow, which rose from a negative $308.9 million in 2020 to a projected range of $800 million to $1 billion, according to the company’s guidance. At the midpoint of this guidance, free cash flow is roughly three times higher than Wall Street’s net income consensus of $297 million, based on EPS projections. This indicates that Palantir is becoming more profitable and generating enough cash to sustain and expand its operations.
Sometimes, a business can actually be a better investment at a higher price when there’s more clarity regarding management and the path to profitability, especially for those in the early stages of growth. In Palantir’s case, each quarter has provided more insight, with expectations consistently being revised upward. This is why, despite the stock’s stretched valuation metrics, an upward revision of the annual guidance could still lead to a significant increase in the share price.
A troubling sign is that even Palantir’s management—who know the company best—are selling shares rather than buying at these prices.
CEO Alex Karp sold approximately 8.7 million Palantir shares worth over $300 million under a trading plan, while co-founder Peter Thiel also initiated a trading plan to sell shares valued at $28.5 million, totaling nearly $1 billion. Of course, there are various reasons insiders sell their shares, but it’s hard to believe they would be selling now if they anticipated continued rapid stock growth in the short to medium term.
Using the TipRanks Insider Transactions tool, we can see that insiders are selling a larger quantity of PLTR stock compared to what is being bought.
At TipRanks, analysts rate PTLR stock as a Hold, with six out of 16 analysts issuing neutral recommendations, another six providing bearish ratings, and only four offering bullish outlooks. The average PLTR price target is $27.67, indicating a downside potential of 36.21%.
I rate Palantir as a Hold ahead of its Q3 earnings report. While the company has made solid progress this year, I’m concerned that its triple-digit growth and high valuation multiples could hinder its performance in the upcoming quarter, potentially dampening the bullish momentum.
Given the significant hype surrounding the stock, simply meeting the upper end of estimates won’t suffice. An upward revision of guidance is necessary to convincingly show how its growth story justifies the staggering triple-digit earnings and cash flow valuation multiples.
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