Palantir Technologies: A Solid Buy Amid Short-Term Volatility

Palantir Technologies (NYSE: PLTR) experienced a stock price drop following its Q1 2024 earnings report, driven by conservative Q2 guidance. However, the overall growth trajectory remains robust, marked by increased revenue, net income, and customer growth. Palantir appears undervalued based on its PEG ratio, and potential inclusion in the S&P 500 could further boost its stock price.

Key Highlights

1. Q1 2024 Performance:
   • Revenue and Earnings Beat: Palantir reported Q1 2024 revenue of $634.3 million, surpassing the consensus estimate of $615.3 million. Earnings per share (EPS) also beat estimates, coming in at $0.08 compared to the expected $0.077.
   • Net Income Milestone: Palantir crossed the $100 million net income mark for the first time, showcasing significant bottom-line improvement.
2. Conservative Q2 Guidance:
   • Revenue Projections: Palantir’s Q2 2024 revenue guidance of $649-$653 million was slightly below market expectations, leading to a stock sell-off.
   • Full-Year Outlook: Despite the conservative Q2 outlook, Palantir raised its full-year guidance to $2.677-$2.689 billion in revenue, with a free cash flow target of $800 million to $1 billion.
3. Operational and Customer Growth:
   • Operating Income Growth: Palantir’s operating income reached $81 million in Q1 2024, continuing a trend of steady increases.
   • Customer Base Expansion: Palantir achieved a 69% year-over-year (YoY) increase in customer count, highlighting strong market penetration.
   • Deal Value Increase: The total contract value of deals closed in the U.S. commercial sector grew by 131% YoY, indicating higher demand and larger contract sizes.

Valuation and Market Position

1. PEG Ratio:
   • Growth-Adjusted Valuation: Palantir’s PEG ratio is 0.238, indicating the stock is undervalued when considering its expected earnings growth. PEG ratios below 1 typically suggest attractive investment opportunities.
2. Relative Valuation Metrics:
   • P/E and P/S Ratios: Palantir’s P/E and P/S ratios appear high compared to sector medians. However, these traditional metrics may not fully capture the growth potential of a rapidly expanding tech company like Palantir.
3. S&P 500 Inclusion Potential:
   • Profitability and Market Cap: With consistent profitability and a sizable market cap, Palantir meets the requirements for S&P 500 inclusion. Such an event could significantly boost the stock price due to increased demand from index funds.

Risks and Considerations

1. Short-Term Volatility:
   • Market Reaction to Guidance: The stock’s drop following Q2 guidance reflects market sensitivity to short-term forecasts. Investors should focus on long-term growth prospects instead.
   • Economic Data Impact: Recent stock price dips were influenced by broader market sell-offs due to economic data, rather than company-specific issues.
2. Operational Challenges:
   • Sustaining Growth: Maintaining high growth rates in revenue and customer acquisition will be crucial. Any slowdown could negatively impact the stock’s valuation.

Technical Analysis

1. Support Levels:
   • Fibonacci Retracement: Key support is identified between $19.70 and $20.21, aligning with the 0.382 Fibonacci retracement level. This zone may attract buying interest and stabilize the stock price.
2. Momentum Indicators:
   • RSI and MACD: The RSI indicates a potential oversold condition, while the MACD shows a bearish trend. However, these signals may be influenced by broader market trends rather than company-specific factors.

Conclusion

Palantir Technologies remains a strong buy despite short-term volatility and conservative Q2 guidance. The company’s robust revenue growth, expanding customer base, and improving profitability present a compelling investment case. Valuation metrics, particularly the PEG ratio, suggest the stock is undervalued relative to its growth potential. Additionally, potential inclusion in the S&P 500 could provide a significant catalyst for further stock price appreciation. Investors focusing on the long-term growth story should consider Palantir a valuable addition to their portfolios.