Palantir (PLTR 2.75%) was one of the hottest stocks in 2024. The stock soared 340% last year, while joining both the S&P 500 and Nasdaq 100 indices.
However, after such a strong run investors may be wondering if the stock is still a buy.
AI opportunity
Palantir originally made its mark as a data gathering and analytics vendor primarily serving the U.S. government. Its technology was able to detect patterns, particularly in the area of money flow, that were not easily recognizable and make predictions. This made it a ideal counter-terrorism tool. Today, Palantir's technology is being used by the Ukraine in its was war against Russia to monitor troop movements and help target things such as tanks and artillery.
After a period of slow growth from its largest customer, the U.S. government, Palantir has started to see its U.S. government growth pick up as the government has begun to embrace artificial intelligence (AI). Last quarter, its U.S. government revenue soared 40%, which was a big jump from the 14% growth it saw for full-year 2023.
However, it is the success the company has been seeing in the commercial realm that has excited investors the most. The company launched its AI platform in 2023 and since then it has seen tremendous uptake. Last quarter, its U.S. commercial revenue soared 54%, while its U.S. commercial customer count surged by 77%.
While a number of large tech companies have been creating ever-improving models to try and take advantage of the opportunity in AI, Palantir is taking a different approach. It ultimately thinks that AI models will start to largely become similar in terms of performance without much differentiation. Because of this, it has been focusing on the application and workflow layers of AI, where it hopes to become organizations' central AI operating system. As such, its AI platform helps with logic and functionality in order to provide the actions needed to finish tasks. This is done in part through its platform's ontology, where it connects digital assets, such as datasets and models, and maps them to their real-world counterparts, such as products and financial transactions.
Palantir then has tools to rigorously test the solutions made through its platform to make sure they can be applied to real-world applications. You've probably heard of well-documented instances of AI making some pretty big mistakes. This was see in the early days with Alphabet's Google AI Overviews where it told users to put glue on pizza, or more recently with Apple Intelligence sending out wildly inaccurate news alerts. These are called AI hallucinations and they need to be very minimized in order for AI to be used in mission critical organizational tasks.
Thus far, much of Palantir's early commercial success has come from proof-of-concept work being done for customers. The company has attracted a lot of new customers through its AI bootcamps, where it trains and helps organizations understand how to apply AI to crucial operations within their operations. The next big opportunity is taking all these new customers and moving them from proof-of-concept work to production. Given how many new customers it has been gaining, this is a huge opportunity.
High valuation
The big knock on Palantir is its valuation. The stock's huge rise has led it to trade at a forward price-to-sales (P/S) multiple of 42 times. That's a huge multiple for a stock that grew its overall revenue by 30% last quarter. To put that into context, that's about twice peak software-as-a-service (SaaS) multiples from a few years ago, when the sector was growing at an over 30% clip.
PLTR PS Ratio (Forward 1y) data by YCharts
The company will have to grow its revenue much more quickly than it is currently and for an extended period of time to justify its current valuation. It is possible given the opportunity it has to move customers from prototype work to production, but it currently isn't in its forecast or analyst estimates. Palantir guided for revenue growth of between 26% to 27% for the fourth quarter, while analysts are currently projecting revenue growth of 25% in 2025.
Meanwhile, the company has seen executives and other company insiders dump a lot of shares of the stock over the past few months. The insider selling started to greatly pick up in mid-September when the stock was in the mid-$30s. This includes selling from CEO Alex Karp, Chairman Peter Thiel, and Chief Technology Officer Shyam Sankar, among others.
Meanwhile, there is the question of whether President Trump's DOGE (Department of Government Efficiency) program aimed at cutting government spending could impact Palantir's growth. One argument is that the government will invest in software from companies like Palantir to help create improve efficiency, while the other argument is that there will be spending cuts across the board, including for software. Right now this in unknown which way this falls.
Overall, while I think Palantir the company is poised to be a long-term winner, the stock's valuation is too pricey for me to consider it a buy.
