Fear, uncertainty, and doubt continue to weigh on the tech sector, and shares in Palantir Technologies (NYSE:PLTR) are no exception. It makes sense that there’s a high level of worry among investors about Palantir stock.
The AI software company’s next earnings release is less than a week away. Given how other tech stocks have sold off after earnings over the past few weeks, I can see why the market may think PLTR is vulnerable to such a tumble.
After all, with shares trading at a high valuation, the phrase “priced for perfection” is thrown around a lot by PLTR bears. Yet while a small bit of bad news could drive a dive next Wednesday, the opposite could just as easily play out.
Furthermore, when considering Palantir’s long-term prospects, valuation today is anything but excessive. This suggests going against the crowd, not following their lead.
Palantir Stock and Pre-Earnings Jitters
Post-market on May 6, Palantir will release its results for the quarter ending March 31, 2024. Analysts have unanimously raised their expectations since the last earnings release, but the market does not share in this optimism. Again, this isn’t a surprising development.
Why? It’s not necessarily the results themselves that investors are concerned about heading into earnings. Rather, it is the updates to guidance, as these could have the greatest impact on which direction Palantir stock goes from here. In the past month, there has been increasing perceptions of a forthcoming AI growth slowdown.
While these concerns have largely been about the hardware end of the industry, they may be spilling over to software-focused AI stocks as well. Nevertheless, while this change in sentiment has resulted in middling price performance for PLTR lately, this may work to your advantage.
Namely, because there’s still a strong chance that next week’s earnings release elicits a positive response from the market. As we recently argued, factors like increased customer count during Q4 2023 point to continued growth during Q1 2024 and beyond. Not only that, this and other factors may point to the company providing promising updates to guidance.
Valuation Concerns are Shortsighted
While Palantir stock soared after its last earnings release in February, it’s worth noting that this post-earnings rally took shape, despite the company reporting mixed guidance for 2024. However, things could play out differently this quarter.
Considering AI commercial customer growth, recent government contract wins, as well as Palantir’s recently-announced sales partnership agreement with Oracle (NYSE:ORCL), updates to guidance could come in ahead of expectations and ahead of prior forecasts. While not certain, a “beat and raise” earnings release could spark a sharp move higher for PLTR.
That said, while a near-term rally would be fantastic, what matters most is the long-term bull case for Palantir. Check out the latest sell-side coverage of PLTR, and you can quickly see valuation concerns being raised once again. For instance, while Moness, Crespi, Hardt analyst Brian White is bullish on Palantir’s growth, he still believes its valuation is too high.
Hence, rather than rating it a “buy,” White rates it a “hold,” on the view that shares will eventually correct, resulting in less-than-stellar returns. Yet while the analyst lays out a substantive case to stay on the sidelines, we find this to be a shortsighted view.
Bottom Line: PLTR is a Strong Buy
On paper, PLTR is very expensive. Shares today trade for 66.8 times forward earnings. Even when accounting for earnings growth forecasts, which call for Palantir’s bottom line to grow 21.1% next year, this valuation still seems rich.
However, this is not a fair way to assess Palantir, in terms of valuation. Much like with other tech giants that have emerged in recent decades, for now Palantir’s focus is on growth, not profitability.
Down the road, when it scales up and reaches maturity, the company will likely take its foot off the growth gas pedal, which may result in a tremendous improvement to operating margin.
With this, growth, not its earnings multiple, is what will determine whether Palantir surges and sinks from here. Far from overvalued, as growth trends remain favorable, Palantir stock is a strong buy at current prices.
Palantir stock earns an A rating in Portfolio Grader.
On the date of publication, Louis Navellier had a long position in PLTR. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
