Is Palantir Stock a Buy Now?

Shares of Palantir Technologies (NASDAQ: PLTR) more than tripled over the last 12 months, with most of that gain coming in just the last three months. Since the beginning of September, the stock has rocketed 134% at the time of this writing and commands a rich valuation of 64 times trailing-12-month revenue and 187 times this year's consensus earnings estimate.

It's fair to say Palantir might be the most loved artificial intelligence (AI) stock on Wall Street right now. Even AI chip leader Nvidia, which just posted a 94% year-over-year increase in quarterly revenue, trades at a much lower price-to-earnings ratio than Palantir.

Successful investing is often about shopping around for the strongest growth at the lowest valuation. As with shopping for anything else you might want to buy, the stock market is the same: You want to find the best quality at the lowest price.

Is Palantir stock worth buying at these lofty highs? It's a relatively small company going after a massive AI opportunity. Let's explore further why investors are willing to pay a premium for the stock, and whether you should buy now or wait for a better price.

Accelerating revenue growth

The reason investors are paying such a high valuation for Palantir is quite simple. AI is redefining the business landscape in the 21st century. The company is winning big corporate deals in droves, which is accelerating revenue growth.

Its product is so good that the government trusts it to handle classified information across military and intelligence operations. Because of these capabilities, the company can price its software to earn high profit margins.

Over the last year, revenue growth steadily improved from 13% in the third quarter of 2023 to 30% a year later. Palantir has been successful with its "boot camps," where customers can see the product in action and how it can be implemented in their operations. This is shortening the deal cycle and helping drive the acceleration on the top line.

Drilling down a little further into its revenue performance, U.S. commercial revenue grew 54% year over year in the third quarter, while the U.S. government revenue grew 40%. This is a notable improvement in the government business, which posted a revenue increase of just 12% year over year in the third quarter of 2023.

Is the valuation justified?

Optimism in Palantir's prospects is further supported by stellar margins. It reported $144 million of net income last quarter, bringing its net profit margin to 20% for the quarter and 18% on a trailing-12-month basis.

Growing free cash flow, which measures the actual cash a business produces after capital expenditures, is also a good indicator that the company is generating quality profits that are not being manipulated by accounting maneuvers. Palantir's free cash flow totaled $980 million over the last year, which represents an even higher margin on revenue of 37%.

But even with that high free cash flow margin, it may not be enough to support the company's $161 billion market cap. At a price-to-free-cash-flow multiple (P/FCF) of 174, the business could double its FCF overnight, and the stock would still look expensive at a P/FCF multiple of 85.

I wouldn't buy a stock going parabolic at this valuation. Palantir has been volatile over its trading history, so the chances are good that the stock will settle down at some point and offer investors a more reasonable valuation to start buying it.

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John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.