The 8-Letter Word Palantir Investors Shouldn't Overlook When Analyzing Its Numbers

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6 days ago

Palantir has relied heavily on adjusted numbers in its earnings reports.
Those adjustments exclude stock-based compensation, which is a relevant cost for investors to consider.
Palantir's high share count is a key reason why the stock is so expensive.
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Palantir Technologies (NASDAQ: PLTR) has been an unstoppable stock to own in recent years. So far in 2025, it's trading up more than 62% as of this writing. It continually hits new heights as investors remain bullish on its performance. The data analytics company has been growing its revenue at a fast pace thanks to its artificial intelligence (AI) platform. With AI, its platform has unlocked more ways for businesses to benefit from greater efficiency and automation.
But there's one 8-letter word that investors should pay close attention to when reviewing the company's earnings numbers, as it can make a profound impact on whether you think the stock is a good buy or not.
It's not uncommon for companies to adjust their earnings numbers, especially when there are unusual items that can affect their top and bottom lines. Oftentimes, when analysts look at whether a company did well or not, they rely on adjusted earnings numbers to determine whether it beat expectations or not. This can reduce the possibility of a one-time gain or loss resulting in a big beat or miss.
With Palantir, however, the company arguably relies too much on adjusted numbers when reporting its figures. Not only is there an adjusted earnings number, but there are also adjusted operating margins and adjusted free cash flow.
In its most recent quarter, for the period ending March 31, Palantir's income from operations was $176 million. But after adding back stock-based compensation plus the employer taxes related to that, its adjusted income from operations more than doubled, to nearly $391 million. Now, its adjusting operating margin becomes an impressive 44%, versus the 20% it would have been without those adjustments. It then uses this adjusted margin in calculating its Rule of 40 score, which comes out to 83% and looks impressive for growth investors.
The problem with this is that stock-based compensation is a relevant expense that still matters; just because a company paid an expense with stock rather than cash doesn't mean it should be ignored.
While Palantir's business is growing its bottom line, the big problem is that it has a high share count. With more than 2.3 billion shares outstanding, its unadjusted net income of $214 million this past quarter amounted to just $0.09 in per-share profit, which pales in comparison to its stock price, which closed at $123.31 last week. And by issuing shares to pay its expenses, that results in a larger share count.
Palantir would need to drastically accelerate its growth or reduce its share count (an incredibly expensive thing to do now while the stock is trading near its all-time highs) for its price-to-earnings multiple to come down. Currently, the stock trades at over 500 times its trailing earnings.
Retail investors have flocked to Palantir's stock due to its impressive growth. But on a per-share basis, it looks incredibly expensive. And the big risk is that it could be due for a sizable correction if there's a downturn in the markets or a single bad earnings report. Despite its seemingly strong business, there can be a lot of volatility to come with owning this stock, due to its incredibly high valuation. When a stock trades at an enormous premium, that means expectations are high. And with Palantir, it's priced to perfection.
Just because the business is growing at a fast rate doesn't mean it's a good buy at any price. There are many better-priced growth stocks out there to consider than Palantir.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
The 8-Letter Word Palantir Investors Shouldn't Overlook When Analyzing Its Numbers was originally published by The Motley Fool