In terms of performance, Palantir Technologies (PLTR) was one of the hottest stocks of 2024. The stock price soared 340% last year while joining both the S&P 500 and Nasdaq-100 indexes. Given that it has already had such a strong run, investors may be wondering if the stock is still a buy.
Let's investigate.
Palantir is making the most of its 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Palantir originally made its mark as a data gathering and analytics vendor primarily serving the U.S. government.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 based on those patterns. This made it an ideal counterterrorism tool. Today, Ukraine is using Palantir's technology in its war against Russia to monitor troop movements and help identify targets like tanks and artillery.
Palantir's largest customer, the U.S. government, has been going through a period of slow growth, but growth has started to pick up as the government has begun to embrace artificial intelligence (AI). Last quarter, Palantir's U.S. government-related revenue soared 40%, a big jump from the 14% growth for all of 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 has seen tremendous uptake. Last quarter, its U.S. commercial revenue soared by 54% while its U.S. commercial customer count surged by 77%.
While many large tech companies have been creating ever-improving individualized models to take advantage of the opportunity in AI, Palantir is taking a different approach. It ultimately thinks that AI models will become largely similar in terms of performance. Because of this, it has been focusing on the application and workflow layers of AI, where it hopes to become the central AI operating system for its clients. Its AI platform helps with logic and functionality to provide the actions needed to finish tasks.
Palantir has tools to rigorously test the solutions made through its platform to make sure they'll work in the real world. You've probably heard of well-documented instances of AI making some pretty big mistakes. This was seen in the early days with Alphabet's Google AI Overviews telling users to put glue on pizza, or more recently with Apple Intelligence sending out wildly inaccurate news alerts. These errors are called AI hallucinations, and they need to be very rare if AI is to be useful.
Thus far, much of Palantir's early commercial success has come from proof-of-concept work for customers. The company has attracted a lot of new customers through its AI boot camps, where it trains people in applying AI to crucial operations. The next step is taking all these new customers and moving them from proof-of-concept work to production. Given how many new customers Palantir has been gaining, this is a huge opportunity.
Palantir has a 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. That's a huge multiple for a stock that grew its overall revenue by 30% last quarter. To put it into context, that's about double the peak software-as-a-service (SaaS) multiples from a few years ago when the sector was growing by over 30%.
PLTR PS Ratio (Forward 1y) data by YCharts
The company will have to grow its revenue much more quickly than it is now, and for a long time, to justify its current valuation. That 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 over the past few months. The insider selling really started to pick up in mid-September, when the stock was trading in the mid-$30s. Sellers included CEO Alex Karp, Chairman Peter Thiel, and Chief Technology Officer Shyam Sankar, among others.
Meanwhile, there is the question of whether the waste-cutting initiative that President Donald Trump calls the Department of Government Efficiency (DOGE), which aims to cut government spending, could impact Palantir's growth. One argument is that the government will invest in software from companies like Palantir to help improve efficiency, while the other is that spending will be cut across the board, including for software. Right now, the outcome is unknown.
Overall, while I think Palantir the company is poised to be a long-term winner, the stock's valuation is too rich at the moment for me to consider it a buy.
