The Federal Reserve’s intention to contain inflation and ensure it’s moving in the right direction is key before initiating its first rate cut. With initial aggressive rate cuts, most businesses could thrive. However, technology companies like Palantir are not as dependent on the Fed’s actions as they focus on automating their processes to raise margins.
Jim Cramer expressed uncertainty about Palantir’s business model, stating, “Palantir is a cold stock I don’t have anything to say about it.” He admitted to struggling to understand what Palantir does and criticized the company for not providing much information about its operations. Despite this, Palantir reported a 27% year-over-year revenue increase during the June quarter, with US commercial revenue growth hitting 55%. The company’s AI technologies have been solving significant business problems, such as the famous hallucination problem in AI systems, drawing from its extensive experience with military and defense systems.
At a recent customer event, Palantir highlighted the tangible benefits its AI platform (AIP) has brought to businesses. Airbus accelerated A350 production by 33%, BP reduced costs per barrel by 60%, and Jacobs Connect cut power usage by 30%. Other corporations like Panasonic, ESI Group, PG&E, Eaton, and Tyson Foods have also reported substantial improvements in waste reduction, productivity, and cost savings thanks to Palantir’s solutions.
Cramer’s skepticism on Palantir’s growth
Despite the promising metrics and success stories, concerns about Palantir’s stock valuation persist. The stock is trading at around 21.2 times the next 12 months’ revenue.
For the fiscal year 2024, Palantir expects revenue growth of 24% year-over-year, reaching $2.746 billion, with an adjusted operating income of $970 million, representing a 35.3% margin. However, revenue growth is forecasted to decelerate over the next two years, with projected 22% YoY growth potentially bringing revenues to around $4 billion by fiscal 2026. If Palantir can enhance its margins by 100 basis points annually, it could generate about $1.5 billion in adjusted operating income by FY26.
Applying a growth multiple similar to the S&P 500, Palantir’s valuation could imply a P/E ratio of 46, translating to a price target of $27, a substantial drop from its current price of $36. Carillon Scout Mid Cap Fund highlighted Palantir as a top contributor for the first quarter of 2024, noting improved sentiment following stronger-than-expected commercial customer revenue and free cash flow. The fund remains optimistic about Palantir becoming a leading AI software provider powered by its Foundry and AIP platforms.
In summary, while Palantir Technologies Inc. ranks 5th on Insider Monkey’s list, its future potential remains tied to its ability to maintain revenue growth and enhance operational margins amidst valuation concerns.
