The AI-driven software company has several key qualities that make it positively stand out from other companies in the AI space, including top-quality ones, such as Nvidia.
Last Tuesday, Palantir Technologies (PLTR -1.90%) stock skyrocketed 23.5% following the software-as-a-service (SaaS) company’s release on the prior afternoon of a powerful third-quarter 2024 report.
The stock’s rise was driven by the quarter’s revenue and earnings sprinting by Wall Street’s estimates, fourth-quarter revenue guidance coming in higher than the Street expected, and management raising its full-year 2024 guidance for revenue and several other key metrics.
The quarter’s year-over-year revenue and adjusted earnings per share (EPS) surged 30% and 43%, respectively, driven by “unrelenting” artificial intelligence (AI) demand, said CEO Alex Karp. The government and commercial businesses both performed well, with their revenue jumping 33% and 27%, respectively. The government/commercial revenue breakdown was 56%/44%.
In addition to its robust revenue and profit growth, below are three other key reasons Palantir stock is one of the best AI stocks on the market.
1. It has a business model that generates recurring revenue
Palantir is a software-as-a-service (SaaS) company. It provides its software via the cloud through subscriptions of varying lengths. Thus, its core business generates recurring revenue.
SaaS businesses that produce recurring revenue tend to be attractive. They often sport high profit margins and their revenue streams tend to be more predictable.
Palantir’s business model is working well. In Q3, its net-dollar retention rate was 118%, up from 114% in the prior quarter, CFO Dave Glazer said on the earnings call. This means that its existing customers from the year-ago quarter increased their spending on its products by an average of 18% over the past year. This metric does not include revenue from new customers that were acquired over the last year, so it “does not yet fully capture the acceleration in velocity in our U.S. business over the past year,” as Glazer noted.
2. Its free cash flow (FCF) margin is trending up and was phenomenal in the quarter
Free cash flow margin is calculated by dividing FCF by revenue. This metric tells us what percentage of a company’s revenue over a given period (such as quarterly or annually) it turned into free cash flow.
Data by YCharts.
Palantir’s FCF margin was just over 57% in the third quarter, which is phenomenal. (The company uses a slightly different metric for FCF called adjusted FCF. Its adjusted FCF margin was 60% in the quarter. No matter, as 57% and 60% are close, and both illustrate the point.)
For comparison purposes, Nvidia (NVDA 1.35%), Meta Platforms, Microsoft, and Broadcom were used because these companies have great track records of delivering strong FCF margins. In other words, the comparison bar here is high.
Granted, quarterly cash flows will vary, so a more telling metric is FCF margin for an annual period. However, except for Microsoft (whose fiscal year ended on June 30, as the orange line indicates), this metric for the most recent fiscal year for the other companies is a little outdated.
3. Limited to no sales to China
Unlike many other companies involved in the AI space — such as Nvidia and other chipmakers as well as chip equipment makers — Palantir generates either limited or no revenue from China. Here’s what it said on this topic in its third-quarter filing with the Securities and Exchange Commission (SEC):
We do not consider any sales opportunities with the Chinese communist party, do not host our platforms in China, and impose limitations on access to our platforms in China […].
Why does this matter? It matters because investors can be assured that Palantir’s business will not take a notable hit if the U.S. government further tightens restrictions pertaining to the export to China and select other countries of AI-enabling products that exceed certain performance thresholds.
Palantir stock’s valuation is very high, but it’s worth paying up for
Reiterating part of the closing from my Palantir Q3 earnings article with relevant numbers updated:
Palantir stock is trading at 127 times projected [2025] earnings. This is a very high forward price-to-earnings (P/E) ratio. But it’s not crazy-high for the stock of a company that Wall Street estimates will grow earnings 48% this year and at an average annual rate of 58.8% over the next five years — and that generates powerful free cash flows (FCFs). FCF has consistently and significantly been exceeding net income.
When you decide to buy a stock, it’s best to dollar-cost average (DCA) your way into your full position. Using this method to buy stocks is even more important for stocks that have recently run-up big and could pull back soon because of profit-taking.
As an example, if you wanted to allocate approximately $1,000 to buy Palantir stock, you could buy $250 worth of shares every quarter for a year. You could also make smaller purchases monthly for a year or longer. This way you don’t risk buying all your shares at what turns out to be a short- or long-term peak.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Meta Platforms, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
