Owners of Palantir have gone on a wild ride so far this year. The stock was up as much as 65% in late January and early February, dipped down 22% in May, and finished the month of June up 11.9% for the year. Now, a few weeks into the second half of the year, the stock has reversed course again, down 9.26% year to date.
Palantir stock started recovering in May, when the company released a strong Q1 earnings report. Revenue was up 49% year over year to $341 million, with U.S. commercial revenue up 72% and U.S. government revenue up 83% from the same period last year.
The software company builds products to help large organizations, both public and private, analyze and utilize data to help improve decision-making. Foundry is its commercial platform, which serves a wide range of industries, including aerospace, cancer research, and logistics companies. Essentially, any company that collects tons of data (which is virtually all large companies these days) could probably use Foundry’s tools to help improve its operations.
While the commercial side of the business is promising, Palantir’s bread-and-butter is working with the U.S. government through its Gotham software platform. The U.S. government spends hundreds of millions of dollars a year with Palantir through its various government agencies. For example, it has recently signed a $110 million deal with the U.S. Special Forces Operation Command, a $33 million deal with the U.S. Space Force, and a $90 million deal with the National Nuclear Safety Administration. On top of that, it has signed a contract with the U.S. Army that has the potential for $250 million in spending if Palantir can hit certain performance targets.
Around 56% of Palantir’s revenue comes from government contracts. This adds customer concentration risk, but all recent press releases indicate that this spending will only grow over time.
Palantir has a clear path to growth ahead, especially with the multiple contracts it has signed with the U.S. government. This is a big reason the company has guided for 30% or greater annual revenue growth through 2025. However, Palantir stock currently trades at a steep valuation, with a price-to-sales ratio (P/S) of 27. This could come down quickly if it hits its revenue growth targets, but the high sales multiple adds risk for any investors currently holding or thinking of buying Palantir stock.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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