Palantir’s profits are growing at a faster rate than revenue.
Just when you think Palantir Technologies (PLTR 1.42%) stock can’t go higher, it finds a way. The data analytics company has been one of the biggest winners due to artificial intelligence (AI). It has been using AI to offer an even better platform to its customers, which it has been winning over in droves.
The company recently posted earnings, and it has beaten expectations yet again. While its valuation may appear to be extremely high, there is a promising trend that, should it continue, could help the stock rally even further.
Strong profits can help improve Palantir’s valuation
Revenue growth can be exciting, but what’s much more important in the long run is the bottom line. If a company can grow its earnings at a high rate, that can improve its price-to-earnings (P/E) multiple and make the stock a better value buy for investors. This can be particularly key for Palantir, whose P/E ratio is now at around 300.
The good news for investors who may be worried about that valuation is that the multiple may come down as the business scales its operations and its bottom line grows. While profitability wasn’t always the norm for Palantir, investors have now become accustomed to strong profits. And margins have been improving in recent quarters.
PLTR Operating Margin (Quarterly) data by YCharts
Operating profits have been rising faster than revenue
In the company’s most recent quarter, Palantir achieved revenue growth of 30%. That’s a quicker rate than the 27% growth it recorded three months earlier. Business is clearly picking up for the company. But what’s more impressive is that its operating profits are rising at an even faster rate, and that’s an extremely positive trend for the stock.
PLTR Operating Margin (Quarterly) data by YCharts
This is a great sign that Palantir is becoming more efficient as it is scaling its operations, creating value for its customers while also finding ways to do it without having to spend excessively. That suggests the business’ platform, AIP, is doing a good job of convincing customers of its usefulness without Palantir needing to invest heavily in sales and marketing efforts to grow its business.
Is Palantir Technologies stock still a good buy?
As of the end of last week, Palantir’s stock was up more than 250% since the start of the year. It has been on a tear, and its latest earnings numbers are sending it to new heights yet again. But at around 300 times earnings, the stock is expensive, and the risk is that, at some point, it may be due for a correction. This is why investors who buy Palantir stock should plan to hold on to it for at least a few years, as a lot of future growth is already priced into its valuation.
If the business can continue growing its top and bottom lines at a strong rate, it’s definitely not out of the question for the AI stock to continue rising in value. But investors should temper their expectations because the types of gains Palantir has been generating this year may not continue in the next year or two; at some point, there could be a strong pullback, especially if the economy falls into a recession and companies cut back on spending and AI-related investments.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
