Every time I look at the stock of Palantir Technologies (PLTR -3.72%), it seems to be at a new record high. The company has been an early winner in the hype cycle for generative artificial intelligence (AI) software. And with shares up 313% year to date at the time of this writing, many investors are wondering how much longer this bull run will last.
Let's explore the pros and cons of Palantir to decide if it still has a place in your portfolio.
Why Palantir?
Founded in 2003, Palantir can be thought of as an early adopter of what we now know as AI. The company specializes in data analytics, which involves processing huge volumes of information to uncover actionable insights and trends. And this tech was a precursor to the large language models (LLMs) behind platforms like ChatGPT.
Palantir was quick to adapt to the evolution of its industry. In 2023, it launched its Artificial Intelligence Platform (AIP), designed to combine LLMs with its legacy data analytics.
The AIP helps clients with real-time decision-making and allows them to create customized applications based on their data in a secure in-house environment. This can be particularly useful for military and law enforcement, giving operators real-time info about threats and targets during field operations while keeping records for legal and regulatory compliance.
What could the next three years have in store?
Palantir's third-quarter revenue increased 30% year over year to $725.5 million, helped by the rollout of its new AI-related functionality, particularly among U.S. government and commercial clients. The company is also consistently profitable, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rising 39% to $283.6 million, although this figure adds back significant outflows like stock-based compensation, which totaled $142.4 million in the period.
Over the next three years, it's safe to assume Palantir can maintain its current growth rate as AI technology improves. Management certainly seems optimistic, with CEO Alex Karp suggesting that organizations that fail to adopt productivity enhancers like its AIP risk being left behind in what he calls a "winner-takes-all economy."
The company has scored some high-profile clients, including the armed forces of Israel and Ukraine, which are both using its software for combat-related missions.
Image source: Getty Images.
That said, while Palantir seems to have established trust within the defense industry, it is unclear if the company will be able to fend off large commercial sector rivals like Microsoft or Snowflake, which also offer data analytics and AI software within their cloud computing ecosystems.
Sorry, but the valuation is silly
Palantir is an easy company to get excited about. It synergizes data analytics with generative AI to serve very cool uses in the military and law enforcement. That being said, hype doesn't pay the bills.
With a forward price-to-earnings ratio (P/E) of 152, its valuation has lost touch with reality. The S&P 500 has an average forward P/E estimate of 23, while the AI industry leader Nvidia has a forward P/E of just 33 despite growing its sales and profits by 94% and 109%, respectively, in its most recent quarter. Palantir is nowhere close to this.
This level of overvaluation will probably cause the stock to underperform over the next three years. And while early investors can pat themselves on the back for making an unusually good bet, it might be time to consider taking some profits off the table.
