Is Palantir (PLTR) Still a Buy at Premium Valuation After Significant Gains?

Palantir (PLTR) is emerging as one of the leading AI companies globally, developing powerful platforms like Gotham, Foundry, Apollo, and AIP. Since the beginning of this year, the company has more than doubled its value through robust earnings results, demonstrating its progress in AI. However, while the street is divided on PLTR stock’s current appeal, despite the stretched multiples I remain bullish on the stock. This confidence is rooted within Palantir’s unique position in the AI revolution which is still in its early stages.

In this article, I will highlight and discuss recent developments regarding Palantir and explain why the current valuation premium may be justified.

Palantir’s Rally This Year

Palantir’s stock has seen triple-digit gains this year, soaring over 140% to reach all-time highs. Several key factors have come together in recent months to fuel this impressive rise.

First, the company’s commercial business has seen accelerated revenue growth. In its Q2 earnings report, released on August 5th, Palantir recorded a 55% year-over-year rise in business from its commercial sector, while government contracts increased by 24%. Another indication of strength comes from Palantir’s margin rates. Palantir achieved an operating margin of 16% in Q2, up 1,400 basis points year-over-year, continuing its trend of increasing profitability. Operating income rose significantly from $10.1 million in Q2 2023 to $105.3 million in Q2 2024.

Additionally, the potential mass adoption of Palantir’s Artificial Intelligence Platform (AIP) has emerged as a major catalyst. With AIP, Palantir has demonstrated unique technology that I view comparably to Nvidia’s (NVDA) microchips. In Q2 alone, the company closed 27 deals valued at $10 million or more.

A final reason for the price surge was Palantir’s inclusion in the S&P 500 index (SPX). The stock joined the index on September 23, solidifying investor confidence, particularly among institutional investors.

A Crucial Metric Reveals Much About Palantir

One of the main pillars of my optimism about Palantir lies in a metric the company reported for the first time in its most recent quarter: it’s status relative to the Rule of 40. The widely discussed Rule of 40 suggests that even if a SaaS (Software as a Service) company has low earnings today, it could still be a good investment if its revenue growth and profit margin percentages together total 40 or more.

During the Q2 earnings call, CEO Alex Karp highlighted that Palantir currently has a Rule of 40 score of 64, with revenue growth of 27% and adjusted operating margin of 37%. While it’s clear that Palantir exceeds the benchmark, how significant is a score of 64?