The AI and data solutions provider Palantir Technologies (PLTR), is scheduled to report its Q3 earnings on November 4, aiming to sustain its impressive growth trajectory this year. Although momentum in the AI sector remains strong, I have concerns about Palantir’s ability to sustain its rally. Specifically, the company relies heavily on positive annual guidance updates to demonstrate that demand for its software is still robust, which may pose a risk if future updates fall short. Therefore, I believe a neutral stance may be prudent for Palantir ahead of the Q3 report.
Furthermore, although Palantir’s AI growth story is still in its early stages and its fundamentals may ultimately justify its current share price in the coming years, I believe that investors who have purchased shares at these valuations ahead of the Q3 report may be paying overly optimistic multiples.
Before delving into the reasons for my skepticism regarding Palantir’s ability to sustain the impressive bullish momentum, it’s important to highlight the factors contributing to its remarkable triple-digit growth in market value over the past twelve months.
In the last two quarters, Palantir reported revenue growth of 20.8% in Q1 and 27.1% in Q2, with gross profits increasing by 24% and 28%, respectively. This led to a gross profit margin of 81%, surpassing Nvidia’s (NVDA) margin of 75%. Much of this success can be attributed to the expansion of its commercial sector, particularly its AI-powered Foundry and AIP platforms, which grew 55% year-over-year in Q2, compared to a 24% increase in government contracts. CEO Alex Karp noted an ‘unrelenting wave of demand’ for production-ready AI systems, emphasizing Palantir’s unique ability to meet that demand.
Over the past two quarters, Palantir has consistently raised its full-year guidance, primarily driven by strong commercial revenue growth, with yearly growth rate estimates increasing from 45% in Q1 to 47% in Q2. The company also revised its total revenue projections, raising its full-year 2024 estimate from $2.677 to $2.689 billion in Q1 to $2.742 to $2.750 billion in Q2. Additionally, it adjusted its income from operations guidance to $966 to $974 million, up from the Q1 forecast of $868 to $880 million.
While it’s hard to argue against Palantir’s strong performance in the first half of the year, I believe that moving forward, just hitting top estimates won’t be enough to sustain its bullish momentum. With expectations already sky-high for Q3, Palantir faces added pressure. Although I expect the company to surpass those estimates, in my view, an upward revision of its full-year guidance will be essential to maintain the stock’s momentum.