Palantir (NYSE: PLTR) has sent contradictory signals to investors. Its Artificial Intelligence Platform (AIP) has offered exponential productivity gains to its clients. One spoke of Palantir accomplishing more in one day than a hyperscaler had in four months. Another claimed to build 10 times faster with 3 times fewer resources.
The problem for investors in the software-as-a-service (SaaS) stock was that these gains did not appear to translate in the financials. However, a boost in a key metric could mean Palantir may finally benefit.
What has changed
In short, the metric to watch is revenue.
Palantir began by leveraging AI and machine learning within its Gotham platform to discover analytical insights in the national security and law enforcement realms. Historically, investors knew Palantir for helping the government find Osama bin Laden.
Later, to maintain growth, Palantir developed Foundry to apply the same principles to applications in the commercial sector. But while this would dramatically expand Palantir's addressable market, growth levels had fallen back into the teens despite earlier promises of 30% annual revenue growth from 2022 to 2025.
Moreover, even the launch of AIP did not initially lead to such growth. As recently as 2023, revenue had only grown by 17%. And in the first quarter of 2024, it had not risen significantly, rising to $634 million, a yearly gain of 21%.
It was not until the recently released report in the second quarter of 2024, which stated that revenue came in at $678 million, rising by 27% year over year.
Also, Q3 revenue, which Palantir forecasts at $697 million to $701 million, implies a 25% revenue gain at the midpoint. Although that is not quite 30%, the company is finally close to achieving that revenue growth goal.
One deal that may help reach that revenue growth goal is Palantir's agreement with Microsoft. The partnership will combine the generative AI capabilities of Microsoft and Palantir to build AI-driven operational workloads, presumably making it a more powerful offering than either company could deliver separately.
Profits and valuation
Additionally, unlike when Palantir made that pledge in 2021, the company is now profitable on a generally accepted accounting principles (GAAP) basis and has been since the fourth quarter of 2022.
Not surprisingly, the revenue growth rate has brought about a considerable profit increase. The $136 million in net income for Q2 is far above the $28 million it earned in the second quarter of 2023.
Also, with the apparent successes of AIP, it should not surprise investors that the stock has risen by more than 60% from year-ago levels.
With that gain, it is unsurprising that Palantir forecasts a positive net income for the remaining two quarters of the year. Indeed, that makes the stock quite expensive. The modest profits of past quarters probably mean the 173 P/E ratio is a poor reflection of its valuation, but with the recent forward P/E ratio of 82, the stock price is probably ahead of the fundamentals.
Nonetheless, investors may question how much valuation matters, particularly when comparing Palantir to Nvidia. The productivity gains from its AI chips have brought Nvidia stock to a price-to-book value ratio of 53, well above Palantir, which sells at 16 times its book value.
Admittedly, Nvidia's triple-digit revenue growth is not a guarantee Palantir will match Nvidia's pace of revenue increases. But it does speak to how fast a stock can grow when revenue growth more closely matches productivity gains.
Palantir moving forward
Considering the increase in revenue growth, Palantir finally looks poised to start meeting the expectations the bulls have had for the stock.
Palantir investors have faced significant frustration. Revenue growth levels over the last two years have fallen short of expectations. Moreover, even with the massive productivity gains offered by AIP, revenue growth was respectable but well short of that initial goal of 30% yearly.
However, the 27% revenue growth in the most recent quarter and the massive productivity gains that AIP offers its clients may finally have translated into rapidly improving financials for Palantir. Also, the partnership with Microsoft could help it match or surpass its previous revenue growth goals.
Indeed, Palantir will probably have to increase its productivity growth further to justify its valuation. Still, if the company continues to report faster revenue growth, the stock could continue to march higher despite its high P/E ratio.
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Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Improvements in this Metric Could Be the Bullish Sign Palantir Stock Needs was originally published by The Motley Fool