During the August 31 episode of Mad Money, Jim Cramer highlighted Palantir Technologies Inc. (NASDAQ:PLTR) as one of the market’s standout performers. He commented:
Second is Palantir which rallied 51%. My take is that Palantir shouldn’t have ever been down to begin with based on the Rule of 40 that we typically use to judge this kind of business. When you add up the revenue growth plus the profit margin, the sum comes to 155. I don’t know how you sell something with that kind of profitable growth.
Explosive Growth and the Rule of 40
Palantir Technologies Inc.’s (NASDAQ:PLTR) operational performance fully backs up Cramer’s bullish view. In its Q2 report, the company posted total revenue of $1.94 billion, representing a staggering 93% year-over-year increase. Growth was driven mainly by its domestic operations, where U.S. commercial revenue surged 149% as enterprise clients aggressively deployed its Artificial Intelligence Platform.
The company generated a GAAP net income margin of 55% along with an adjusted free cash flow margin of 63%. More importantly for the Rule of 40 calculation, Palantir posted a 62% adjusted operating margin. Combined with its 93% revenue growth, Palantir Technologies Inc.’s (NASDAQ:PLTR) Rule of 40 score reached an extraordinary 155%, which places it in a rare tier compared to standard enterprise software peers.
Valuation Pressures and the Bear Case
Despite these significantly strong numbers, the valuation multiples have reached extreme territory. Trading at 115x forward earnings, Palantir Technologies Inc. (NASDAQ:PLTR) prices in nearly flawless future execution.
Heavy insider selling following the post-earnings surge was also noted, as company executives and insiders have cashed out tens of millions of dollars in stock. For more details you can check out the insider selling tracked by Insider Monkey. Moreover, any sudden cooling in corporate artificial intelligence spending or tightening of government defense budgets could trigger a sharp valuation compression for a company priced for absolute perfection.
Smart Money Backing and Short Interest Trends
According to Insider Monkey’s Q2 data, institutional backing shifted slightly, with 86 hedge funds holding stakes compared to 96 in the previous quarter. This pullback by smart money funds shows lingering valuation caution. At the same time, short interest rests at 3.18% of the float, showing that very few traders are willing to bet against the massive momentum generated by consecutive earnings beats.
Betting against a company posting numbers like these remains a difficult proposition. When a business matches massive commercial expansion with record profit margins, waiting around for a valuation pullback often leaves investors on the sidelines while the underlying momentum carries the stock higher.
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