Palantir Technologies (NASDAQ:PLTR) stock has arguably been one of the highest-profile success stories of the artificial intelligence (AI) revolution, alongside Nvidia. Since ChatGPT was unleashed in late 2022, Palantir shares have skyrocketed more than 2,500%!
But in recent days, Michael Burry has been warning about an AI bubble. He’s famous for spotting and profiting from the 2008 housing bubble (memorably portrayed in The Big Short movie).
In fact, Burry has put his money where his mouth is and has bet against both Palantir and Nvidia. According to regulatory filings, his hedge fund has bought put options that will soar in value if the share prices crash (the Palantir contract is worth roughly $912m).
Should Palantir investors be worried? Or with the stock down 9% as I write today (4 November), is this a chance to consider investing?
Beat-and-raise quarter
If investors were just going on business performance, then there are absolutely no worries on this front. Because Palantir’s Q3 results released last night were spectacular.
Revenue surged 63% year on year to $1.18bn, easily surpassing Wall Street’s expectations. This beat extended to the bottom line, with adjusted earnings per share of $0.21 ($0.17 expected).
Meanwhile, adjusted operating profit of $601m represented a powerful 51% margin. The net margin came in at 40%, which is just incredible for a company that was loss-making as recently as 2022.
For context, net income of $476m basically matched what the data analytics firm generated in total revenue for Q3 just three years ago!
Another thing worth mentioning is that surging US commercial revenue — up a staggering 121% — is now approaching the same level as US government revenue. So, as more companies and organisations flock to its Artificial Intelligence Platform, Palantir is becoming far less reliant on government contracts to drive growth.
Looking ahead, management raised full-year revenue guidance to around $4.4bn, up from $4.15bn previously.
Rule of 40
As always, colourful chief executive Alex Karp wasn’t shy in singing Palantir’s praises, saying these were “arguably the best results that any software company has ever delivered“.
He normally also has a dig at Palantir’s doubters, and my favourite quote here was: “[Our] ascent has confounded most financial analysts and the chattering class…Some of our detractors have been left in a kind of deranged and self-destructive befuddlement.”
Karp also trumpeted Palantir’s ‘Rule of 40’ score. This metric, which is used to assess the health of software firms, states that the combined revenue growth rate and profit margin should ideally equal or exceed 40.
When we add Palantir’s revenue growth (63%) to its adjusted operating margin (51%), we get a score of 114. This is incredibly high, even if the unadjusted margin of 33% is used. It means that Palantir is delivering a very strong mix of growth and profitability.
Dip-buying opportunity?
So, is the stock worth considering? I don’t think so, and not just due to Burry’s bearishness. Because even after today’s 9% dip, the stock’s trading above 100 times this year’s forecast sales. This sky-high valuation worries me.
Essentially, it means there’s zero margin for error, which could come in the form of missed earnings or slowing top-line growth. Personally, I would consider selling some shares if I owned any (I don’t).
Palantir stock will stay on my watchlist for now.
