Here's why Palantir stock price is cheap and could surge 35%

Palantir's stock (PLTR) has surged, driving its market cap above $321 billion, fueled by strong revenue growth in both its commercial and government sectors, with US commercial revenue rising 71% in the last quarter. The company's full-year guidance projects total revenue growth of 36% and U.S. commercial revenue growth of 68%. Despite high price-to-earnings ratios, analysis using the rule of 40, which considers growth and margins, suggests the stock may not be as overvalued, and technical analysis indicates a potential further 35% increase with a target of $184.

Analysis

Palantir Technologies (PLTR) has demonstrated significant operational momentum, evidenced by its stock price surging 110% from its April low to $139.77, pushing its market capitalization above $321 billion. This performance is underpinned by substantial revenue growth, with annual revenue increasing from $1.09 billion in 2020 to $2.8 billion in the last reported year, and a transition to profitability with over $579 million in trailing twelve-month profit. Recent quarterly results highlighted accelerating growth, particularly in its U.S. commercial segment which saw revenue jump 71% to $255 million, contributing to a 39% rise in total quarterly revenue to $884 million. Management has issued strong forward guidance, projecting 36% total revenue growth and 68% U.S. commercial revenue growth for the full year. While traditional valuation metrics such as a forward Price-to-Earnings ratio of 228 and an EV to EBITDA ratio of 176 appear stretched compared to sector medians, the "Rule of 40" metric, which combines Palantir's 31% forward revenue growth with its net income and free cash flow margins of 18% and 29% respectively, yields a score between 49% and 60%, suggesting the valuation may be more justifiable when growth is considered. Technical analysis further supports a bullish outlook, with the stock breaking out of a cup and handle pattern, targeting a potential 35% upside to $184, contingent on maintaining support above the $120 level.

Key Decisions for Investors

• Investors should weigh Palantir's robust revenue acceleration, particularly in the U.S. commercial sector, and its strong upwardly revised guidance against its high traditional valuation multiples, noting the 'Rule of 40' metric which suggests a more favorable valuation.
• Continued monitoring of Palantir's ability to meet or exceed its ambitious growth targets, especially in U.S. commercial revenue (guided at 68% growth), and maintain healthy margins will be critical for validating the current stock valuation and bullish sentiment.
• From a technical perspective, while the breakout from the cup and handle pattern suggests a potential price target of $184, investors should consider the $120 support level as a key risk indicator that could invalidate the bullish short-term outlook if breached.