Palantir vs Parsons Stock: Which Is Best?

Palantir (NYSE:PLTR) and Parsons (NYSE:PSN) are two of the biggest digital service providers for US military and intelligence agencies.

Both companies trade publicly, and both appear to be in an excellent position to take advantage of rising demand for next-generation AI and cybersecurity solutions.

The question for investors, though, is which of these promising stocks is actually the better buy?

Palantir Set To Grow Earnings at 40% Annually?

Palantir is well-known for its data analytics and its use by government and military agencies. With AI rapidly advancing, Palantir has been one of the companies at the forefront of applying the technology to military and intelligence needs.

As part of this ongoing effort, the company has even been chosen for a $250 million contract to research AI applications for the Department of Defense.

Growing demand for Palantir’s analytical know-how has driven strong revenue growth over the past year. In Q1, the company reported year-over-year revenue growth of 21%.

Alongside this excellent top-line result, Palantir was also able to increase its customer count by 42% and generate a 23% adjusted free cash flow margin. All together, these performance indicators show that Palantir is on a strong growth trajectory.

At this point, Palantir is highly profitable and appears likely to remain that way. The company reported $106 million of GAAP net income in Q1, resulting in $0.04 of earnings per share. This was its sixth consecutive profitable quarter, suggesting that profitability has set in as a broader trend.

Over the past 12 months, Palantir has delivered $209.8 million in total net income on $2.2 billion in revenues.

The bigger story for Palantir is the company’s strategy for expanding its AI solutions beyond government contracts and into the commercial realm.

In Q1, the company’s US commercial revenues grew 40% year-over-year, nearly double the overall rate. Providing services for the private market could not only provide Palantir with a lucrative new revenue stream but also help it diversify away from its reliance on government contracts.

With AI currently being all the rage, it’s also worth noting just how good Palantir’s competitive position in this area is. Thanks to its long history of servicing government data analytics needs, Palantir is far out in front of many of the AI startups that exist in today’s market.

Though it faces meaningful competition from other majors like Alphabet and Microsoft, the company has a real chance to establish itself as one of the leading AI platforms for both government and business use.

Cumulatively, these positive factors have the potential to generate a high level of sustained earnings growth for Palantir. Over the next 3-5 years, the company’s earnings per share are expected to rise at an annual rate of nearly 24%.

Parsons Financials Better Than Expected

Like Palantir, Parsons is a provider of digital services to government and military agencies. The company delivers cybersecurity, intelligence and surveillance solutions, including services for missile defense systems.

Parsons has been on a revenue growth tear over the past year. In Q1, the company reported 29% year-over-year organic revenue growth, marking the fourth consecutive quarter with growth of over 20%.

In addition, the company’s backlog rose $644 million to a record of $9.0 billion, setting the stage for continued revenue growth as Parsons continues to deliver on new contracts.

It’s worth noting that the company still took a loss of $107 million for the quarter. That number, however, doesn’t tell the whole story.

In Q1, Parsons repurchased convertible notes that would have matured in 2025. This repurchase cost the company $214 million but protected shareholders from the effects of dilution if the notes were converted into equity.

Excluding this one-time repurchase, Parsons would have earned $0.49 per share for the quarter, up from $0.23 in the year-ago period.

Clearly, this level of earnings growth is impressive. Even better for investors is the fact that the company is expected to continue raising earnings for some time.

Over the coming year, GAAP earnings per share are expected to increase by about 43%. On the five-year horizon, that number is expected to level off to a compounded annual rate of about 13%.

Even accounting for the repurchase, Parsons has been profitable over the last year. Though not as impressive as Palantir’s profitability, the company delivered a net income of $161.2 million on $5.4 billion in revenue.

It’s worth noting here that Parsons’ revenue is already more than double Palantir’s, a fact that somewhat levels the playing field against Palantir’s growth opportunities in commercializing AI.

Palantir vs Parsons Stock, Which Is Best?

According to analysts, Parsons stock is the better buy with 13.5% upside potential to fair value of $89.10 versus Palantir which is already trading near analysts’ consensus price target.

At the end of the day, the buying decision between these two stocks may come down to value. While both companies appear to have bright futures, Palantir is currently trading at a much steeper valuation than Parsons and so may be a riskier purchase.

Palantir currently trades at 131.3x forward earnings and 21.0x sales, both multiples that require it to maintain an extremely high level of growth in order to justify.

Parsons, by contrast, trades at 30.8x forward earnings and 2.1x sales. Both stocks have fairly high price-to-earnings-growth ratios, but Parsons once again is more reasonable at 2.4x compared to Palantir’s 4.9x.

This value disparity can also be seen in analyst price forecasts. The median target price for Parsons is $90, implying an upside of about 13.6% from the most recent price of $79.25.

Palantir has a median target price of $23. This suggests an upside of only about 9.5%. In addition, analysts are sharply divided on Palantir, with only about a quarter of those covering the stock rating it as a buy. By contrast, 9 of the 10 analysts covering Parsons have issued buy ratings for the stock.

Even with a bit less potential for growth, Parsons appears likely to be the better buy at the moment. Palantir will probably continue to deliver excellent results as it continues to move into commercial services.

Parsons, however, trades at a valuation that is much more reasonable while also offering a decent level of expected growth in its own right. Taking price into account, Parsons looks likely to offer better and more stable long-term returns.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.