The first half of the year has been a good one for stocks involved with artificial intelligence (AI). Palantir Technologies (NYSE: PLTR) has seen its share price increase by 50% through the first six months of 2024, well above the S&P 500's gains of 14%. The data analytics company, however, is still in the early innings of its growth, as it sees plenty of potential for its AI platform, AIP, to generate more opportunities and draw in more customers in the future.
After accumulating such impressive gains through the first half of 2024, is there more in the tank for the stock this year? Can Palantir still be a good buy right now, or is the stock likely running out of steam?
Building off these gains won't be easy
Palantir has been doing well this year, but one problem that could limit further gains is that it's trading at an inflated price-to-earnings (P/E) multiple of nearly 230. Over time, that multiple should come down, provided that Palantir keeps growing and its margins improve. And there's reason to be optimistic on this end, as the company's profit margins are much stronger than they have been in the past.
PLTR Profit Margin (Quarterly) data by YCharts
Unfortunately, even with those high margins, the company's diluted earnings per share (EPS) in the first three months of 2024 was just $0.04 due to its high share count (more than 2.2 billion outstanding). Even if it were to maintain that over the course of a full year, that would equate to a 12-month EPS of $0.16. With the stock price at around $28, its P/E ratio would still be around 175.
Analysts are also worried about the stock's inflated valuation; the consensus analyst price target is just $21.25 for Palantir, suggesting a downside risk of 24% from where the stock trades today.
The growth rate needs to improve
One thing that can drastically improve Palantir's financials and the premium that investors are willing to pay for the AI stock is a higher growth rate. If the top line is increasing at a quicker pace and the company is still generating strong margins, that will lead to a better bottom line, which, in turn, will improve the stock's valuation.
And while Palantir's growth rate has been decent, it's not the type of AI-fueled growth you may expect from a company that is supposedly getting an influx of demand due to its AI platform. In the first quarter, the company's revenue grew at a rate of 21% year over year. And for the full year, Palantir projects its top line to come in at around $2.7 billion, which suggests revenue will rise by a comparable rate -- no huge boost. While the growth rate is better than the 17% revenue increased by in 2023, Palantir will likely need to improve upon this for it to attract more AI investors.
Is Palantir Technologies stock a good buy for the second half?
Palantir's stock possesses a lot of promise, but the numbers aren't convincing enough to suggest the stock can continue to perform at this rate. Without a much bigger improvement in its growth rate, it may be difficult for the company to convince investors it's worth paying a big premium for the business.
Even with high margins, the company's earnings multiple is incredibly steep. It's one thing if the business were generating Nvidia-type revenue growth, but it isn't. Failing that, there's no overwhelming reason to buy the stock at what remains an egregious valuation.
Unless the company knocks it out of the park in the next two quarters, I expect the second half to be an underwhelming one for Palantir's stock. At such a high valuation, there isn't any margin of safety for the stock, which can make holding on to it right now a risky option for investors.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
