Shares of Palantir Technologies (NYSE: PLTR) dropped 8% despite the company reporting solid first-quarter results and increasing its full-year guidance.
Let's look at the company's quarterly results, why the stock is falling, and whether this is a buying opportunity for long-term investors.
Reaccelerating growth
Palantir reported strong first-quarter results, with revenue growing 21% to $634 million. That marked its third consecutive quarter of accelerating revenue growth. Its revenue growth bottomed at 13% in the second quarter of 2023, before accelerating to 17% in Q3 and 20% in Q4 last year.
Commercial revenue jumped 27% to $299 million, led by a 40% surge in U.S. commercial revenue to $150 million. It said excluding strategic commercial contracts, commercial revenue was up 36% with U.S. commercial revenue increasing 68%.
The company added 41 net new customers in its U.S. commercial business, while it also said that it is seeing solid expansion within existing customers. Palantir credited its Artificial Intelligence Platform (AIP) for the strong U.S. commercial growth, as well as its continued focus on "Bootcamps," which it uses to introduce AIP to new customers. It used an example of a large utility signing a seven-figure deal just days after completing a Bootcamp.
International commercial revenue, meanwhile, grew 16% to $149 million, but fell 3% sequentially. The company said it continues to see headwinds in Europe and that there was a revenue catch-up in Q4 that it didn't see in Q1.
AIP offers the biggest potential future growth driver for Palantir, so its rapid adoption among U.S. commercial customers is a big positive. The company has shown it not only has a strong product, but its go-to-market strategy with its Bootcamps is also working. However, the relatively modest growth coming out of Europe, which represents about 16% of its business, is a bit discouraging. Palantir discussed a weak macro backdrop in Europe, but its AI platform should seemingly be able to help reduce costs and this type of business shouldn't be as affected by macro weakness.
Image source: Getty Images
On the government side of the business, revenue grew 16% to $335 million. U.S. government revenue rose 12% from a year ago and was up 8% sequentially to $257 million. Palantir noted that it is the sole contractor on the Army's TITAN (Tactical Intelligence Targeting Node) program and that it expects to see more growth in its U.S. government business over the course of the year. International government revenue surged 33% year over year, but declined 9% sequentially to $79 million.
Palantir's U.S. government business is improving, but overall growth is still relatively modest. This can be a lumpy business; however, given the current geopolitical tensions, it is a bit disappointing the business is not growing more quickly.
Palantir raised its full-year revenue outlook to a range of $2.677 billion to $2.689 billion, above its prior revenue forecast for a range of $2.652 billion to $2.668 billion, It also revised its adjusted operating income forecast to a range of $868 million to $880 million from a range of $834 million to $850 million.
For the second quarter, it guided for revenue to come in between $649 million and $653 million and adjusted income from operations of between $209 million and $213 million.
Why the stock fell
One of the main reasons Palantir's stock sank despite its solid results is the stock's valuation. The stock currently trades at nearly 18x forward sales, which is a high multiple for a company only growing revenue in the 20% range, and it was over 20x ahead of earnings before the stock sold off. To justify this valuation, the company needed to see signs of growth accelerating even more than it is.
While Palantir increased its full-year revenue guidance, the high end of its full-year forecast still only represents 21% growth compared to 2023 when it recorded revenue for $2.225 billion and analysts were generally looking for the company to raise its guidance even higher. The company beat the top end of its Q1 revenue guidance by about $18 million, but only raised the top end of its full-year guidance by around $21 million. So much of the guidance increase is just coming from its first-quarter revenue beat, without much expected follow through.
Meanwhile, the sequential declines in European commercial and international revenue growth is also a bit worrisome in light of the stock's valuation. And while its U.S. government business is improving, it's still its slowest-growing segment.
Is it time to buy the stock?
Palantir's stock has had a huge run over the past year, and much of that was on the expectation of much higher future revenue growth driven by AIP. While AIP has a lot of potential, it has not added enough to overall revenue growth at this point to justify Palantir's valuation.
Even with its recent sell-off, Palantir's valuation has not come down enough to justify trading at 18x forward sales. I'd need to see a lower stock price or signs that growth will return to over 30% before buying the stock.
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Geoffrey Seiler 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.
