Palantir Technologies (PLTR) has been a star performer in 2024, with its stock surging an eye-popping 293% year-to-date. The growth in shares of this data analytics and software company is primarily driven by soaring demand for its artificial intelligence (AI) solutions, which have found applications across various industries. This growing adoption has boosted Palantir’s financial performance, driven its customer base, and solidified its position in the AI industry.

While Palantir’s growth story is compelling, its valuation has become a topic of debate. The stock’s meteoric rise has priced in much of its future potential, as reflected by analysts’ average price targets. Wall Street analysts’ average price target suggests the stock may be overdue for a significant correction from its current elevated levels.

Let’s examine Palantir’s performance, growth drivers, and valuation to assess whether this high-flying AI stock is overdue for a correction or if there’s more upside ahead.

Breaking Down Palantir’s Performance

Palantir continues to solidify its position as an AI and data analytics leader, delivering back-to-back solid quarterly performances. With accelerating growth and a robust balance sheet, the company’s latest performance highlights its potential as a compelling long-term investment in AI.

Revenue Momentum

Palantir’s Q3 2024 results set new records, with revenue climbing 30% year-over-year to $726 million. Q3 marked the sixth consecutive quarter of accelerating growth, reflecting surging demand for its solutions. The company’s adjusted operating margin expanded to 38%—up from 29% a year earlier—while GAAP net income reached an all-time high of $144 million. 

This balance between rapid top-line expansion and profitability suggests that Palantir could deliver solid growth even at a large scale and generate sustainable earnings in the long run.

AI Driving Rapid Adoption

Central to Palantir’s growth is its Artificial Intelligence Platform (AIP), which has seen explosive adoption. The company secured 104 deals in Q3 valued at over $1 million each, contributing to a 33% year-over-year increase in total contract value (TCV) to $1.1 billion. Particularly noteworthy is the U.S. commercial segment, where revenue surged 54% year-over-year, reflecting the transformative role of AI in enterprise operations.

Palantir’s AIP stands out for its scalability and adaptability, appealing to diverse clients across sectors. As industries increasingly leverage complex data for actionable insights, Palantir’s leadership in AI-powered solutions is expected to continue driving demand.

Diversified Revenue Streams

A dual focus on government and commercial markets gives Palantir a diversified revenue base. In Q3, government revenue grew 33% year-over-year, bolstered by solid demand from defense and intelligence agencies. The U.S. government division recorded solid growth, with revenue up 40% year-over-year.

The commercial segment also performed well, posting a 27% year-over-year increase in revenue. Palantir’s U.S. commercial customer base grew by an impressive 77%, demonstrating its ability to attract and retain clients. Even amid geopolitical challenges, international revenue remained resilient, supported by long-term partnerships.

Financial Strength and Cash Flow

Palantir’s financial health is another strong point. The company generated $435 million in adjusted free cash flow (FCF) in Q3, contributing to a record $1 billion in trailing 12-month FCF. With $4.6 billion in cash and investments, Palantir has the liquidity needed to pursue strategic acquisitions and reinvest in research and development.

Upgraded Guidance Signals Confidence

Palantir’s management raised its 2024 guidance across key metrics, reflecting sustained growth. Full-year revenue is expected to reach $2.807 billion, representing 26% year-over-year growth. The company also projects an adjusted operating income of $1.054 billion and free cash flow exceeding $1 billion. These upward revisions reinforce Palantir’s ability to capitalize on secular trends like the AI revolution.

Analyst Caution vs. Investor Sentiment

While Palantir’s growth story is compelling, its valuation raises concerns. The stock trades at a lofty price-to-sales (P/S) ratio of 67.6, significantly above industry averages. Wall Street analysts' average price target of $36.50 suggests a potential downside of 46% from recent levels. This reflects skepticism about whether the current valuation leaves room for further upside, especially if growth moderates.

Despite these valuation concerns, investor enthusiasm for Palantir remains high. The rally in PLTR stock reflects investors' belief that the company is well-positioned for continued growth, driven by AI demand, which justifies its premium valuation.

Investment Takeaway on PLTR Stock

Palantir’s blend of strong financial performance, rapid AI adoption, and diversified growth across commercial and government sectors makes it a standout choice for growth-oriented investors. Its AIP platform positions it as a leader in the rapidly expanding AI market, while a solid balance sheet provides stability.

That said, the stock’s expensive valuation warrants caution. While Palantir has proven its ability to deliver exceptional growth, its current price leaves little margin for error. For long-term investors with a high risk tolerance, Palantir remains an attractive play on AI. However, those wary of volatility may prefer to wait for a potential pullback before jumping in.