Palantir Technologies (NYSE: PLTR) rallied more than 200% in the past five years. Not only has the data analytics company achieved significant growth during that stretch, but its operations have also become profitable. The business is gaining more credibility, and it may only be a matter of time before the stock gets added to the S&P 500 index.
The tech company is coming off yet another impressive quarter that saw it hit new records. Has the stock finally proven its doubters wrong, and is it a surefire buy at this point?
Palantir's growth rate keeps accelerating
A big concern I had with Palantir in the past was that its growth rate simply wasn't showing enough progress despite all of management's claims of incredible demand due to artificial intelligence (AI). Palantir, after all, had hundreds of bootcamps with potential customers to showcase its AI-powered platform, AIP, which would help them improve decision-making and unlock efficiencies in their day-to-day operations.
This past quarter, which ended in June, Palantir's revenue hit a new record of $678.1 million. It marked a 27% increase from the same period last year. And that means that's yet another quarter of the business' growth rate picking up pace.
Why isn't Palantir's stock soaring?
Given its high growth rate, especially at a time when many businesses are struggling due to inflation and waning consumer demand, you might be wondering why Palantir's stock isn't taking off.
The problem may lie with its mammoth share count. Palantir's share count is fairly high with more than 2.2 billion shares outstanding. Even though the company generated a strong 20% profit margin and net income totaled $134.1 million this past quarter, that still equates to a per-share profit of just $0.06 when you divide that profit by all those shares.
That, in turn, hurts the stock's valuation. If the stock is trading at around $29 and the company's annual earnings per share is just $0.17, investors are paying a massive price-to-earnings multiple of 170. Even based on revenue, the stock is trading at a multiple of 29. And if you look at the price/earnings-to-growth ratio, which factors in future growth, Palantir is at a multiple of nearly 2, which is still a bit high.
Although in the tech world investors are often willing to pay obscene valuations for high growth, there is plenty of resistance for Palantir's stock at such heights. While its growth rate is impressive, it may not be enough to justify this kind of a valuation.
Palantir's valuation is just too rich to make it a good buy right now
Palantir is doing a lot of things well. It's profitable and its business is growing, but that's not enough to make the stock a good buy. If the company were to buy back shares and drastically reduce its share count, that could go a long way in generating more bullishness around the business.
Unfortunately, without a lower share count or significantly higher profits, investors may continue to find the stock simply too expensive to buy at its current levels. The danger of buying at such high multiples is that investors end up paying for a lot of future growth. At a time when many stocks are starting to show signs of weakness, there may be better options out there for growth investors, which is why I don't think these results are going to be enough to send Palantir's stock much higher this year.
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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.
Is Palantir Technologies a No-Brainer Buy After Posting Record Numbers? was originally published by The Motley Fool