One of the most intriguing players to emerge in the era of artificial intelligence (AI) is Palantir Technologies(NASDAQ: PLTR). The company had already made a name for itself in the defense and intelligence spaces and has been working diligently to prove its mettle for enterprise-level businesses. Those aspirations have come into focus over the past couple of years, as Palantir has gained more than 900%. The commensurate increase in its valuation has raised the alarm and been the subject of much debate in Wall Street circles.
Palantir reported results after the market close on Monday, and to say it crushed expectations might be an understatement. Not only did the company easily surpass estimates, but management's guidance suggests its growth will continue to accelerate.
Let's take a look at what drove Palantir's robust results and what the future might hold.
Image source: Getty Images.
The poster child for AI
For the fourth quarter, Palantir generated revenue of $828 million, up 36% year over year and 14% quarter over quarter. This resulted in adjusted earnings per share (EPS) of $0.14, which climbed 75%. To put the results in the context of expectations, analysts' consensus estimates were calling for revenue of $782 million and EPS of $0.11, so Palantir easily cleared Wall Street's already high bar.
The results were fueled by U.S. commercial revenue that jumped 64% year over year and 20% sequentially -- well ahead of management's guidance for growth of at least 50%. The U.S. government segment also answered the call, with revenue climbing 45%.
Customer metrics underpinned the company's robust results. Palantir's customer count grew 43% year over year, driven by a 73% increase in U.S. commercial customers. The underlying deals that fueled the results were also eye-opening, as Palantir inked 129 deals worth at least $1 million. Of those, 58 were worth at least $5 million, and 32 were worth at least $10 million.
It's worth noting that many of these contracts are also helping to lay the foundation for future profits. The company's remaining performance obligation (RPO) -- or sales not yet booked as revenue -- climbed 40% year over year to $1.73 billion. When RPO is outpacing current revenue growth, it provides insight into future potential, suggesting its growth spurt has further to run.
The spark that ignited Palantir's blockbuster growth is the company's Artificial Intelligence Platform (AIP), which is revolutionizing the way businesses profit from AI. The company employed a novel approach, hosting boot camps that marry users with Palantir engineers to help them apply AI to mission-critical operations, "going from zero to use case in five days or less." That strategy has been wildly successful.
What the future could hold
Palantir provided full-year revenue guidance for 2025 of $3.75 billion, which would represent year-over-year growth of 31% at the midpoint of its guidance. The biggest contributor to its rosy outlook is the U.S. commercial segment -- which includes AIP -- as management is now forecasting growth of 54%, up from management's forecast for 50% growth just last quarter.
In Palantir's letter to shareholders, CEO Alex Karp said of AI, "We are still in the earliest stages, the beginning of the first act, of a revolution that will play out over years and decades."
The data clearly shows that Palantir is firing on all cylinders. However, some investors are concerned that the stock has gotten away from itself and Wall Street has joined the chorus. Of the 22 analysts that offered an opinion in February, only three rate it a buy or strong buy, 13 rate it a hold, and the remaining six rate hold underperform or sell ratings. Palantir's biggest doubters are nearly universal in citing the stock's valuation as the reason for their bearish calls.
A quick look at the numbers helps illustrate why. The stock is currently selling for 412 times earnings and 75 times sales (as of this writing) -- which is astounding by any stretch of the imagination. However, the most widely used valuation metrics tend to fall short when assessing high-growth stocks. Applying the more appropriate forward price/earnings-to-growth (PEG) ratio -- which considers Palantir's accelerating growth -- clocks in at 0.38, when any number less than 1 suggests an undervalued stock.
That said, given its lofty valuation, Palantir will continue to be volatile, and failure on the company's part -- real or perceived -- to live up to investors' elevated expectations could bring the stock crashing down. Recall that between early 2021 and late 2022, Palantir stock shed as much as 83% of its value.
The generative AI market is expected to be worth between $2.6 trillion and $4.4 trillion over the coming decade, according to global management consulting firm McKinsey & Company. If Palantir can successfully navigate the stormy seas of AI adoption and continue to carve out a profitable niche for itself, the stock price could be much higher a decade from now -- but there will likely be numerous pitfalls along the way.
Given the company's reliable execution, significant opportunity, and expanding profits, I believe Palantir Technologies is worth owning for the long term. However, given its frothy valuation, it may be safer to buy on weakness, or by dollar-cost averaging into the stock.
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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
