With shares up 410% over the last 12 months, Palantir Technologies (PLTR -0.22%) has made its fair share of millionaires out of early investors. The data analytics company has become a Wall Street darling after incorporating generative AI into its business model.
But is the optimism overblown?
Let's dig deeper to find out if Palantir stock still has multibagger potential or if it is on the verge of a massive correction.
Palantir is "cool"
As social media and low-cost trading platforms like Robinhood help popularize the stock market among retail investors, a company's "coolness" value is becoming too big to ignore. With over 31k followers on its Reddit page and 247,000 on X.com, Palantir Technologies seems to be developing a cult following. And it isn't hard to see why.
NASDAQ: PLTR
Key Data Points
The company is a spy buff's fantasy -- developing big-data analytics platforms that helped the U.S. track down Osama Bin Laden in 2011 and assisting the government of Ukraine with targeting in its war with Russia. Incorporating new, generative AI-based features brings its software deeper into sci-fi territory, allowing soldiers to get real-time updates about enemy formations in the middle of combat.
Like Tesla's CEO Elon Musk, Palantir's co-founder and CEO Peter Thiel isn't afraid to court controversy. The billionaire executive openly backed Donald Trump's presidential campaign and is said to have introduced Trump to his current vice president, JD Vance. Palantir seems like part of the political "in crowd," and the market seems to like it.
Fourth-quarter results: A mixed bag
However, while Palantir is enjoying plenty of hype, its operational results are a mixed bag. Fourth-quarter revenue grew 52% year over year to $558 million as more clients incorporated its data analytics software. U.S. commercial revenue (up 64% to $214 million) is becoming one of the company's core growth drivers. However, despite the growth, this might prove to be Palantir's most vulnerable revenue stream.
Unlike government contracts, where partially CIA-funded Palantir can lean on its trust and reputation to gain business, its economic moat seems much weaker among corporate clients. Businesses have many options for AI and big-data analytics, including giants like Microsoft and Snowflake, which offer similar services along with their cloud computing suites. Competition could limit Palantir's long-term growth potential and margins.
Speaking of profits, Palantir isn't doing so great there either. While the company says adjusted net income jumped 80% to $341.9 million, this number adds back a jaw-dropping $281.8 million in stock-based compensation, which is equity paid to employees.
Image source: Getty Images.
Stock-based compensation is popular because it allows cash-strapped young companies to attract and motivate staff. However, this isn't free money because it comes at the expense of diluting shareholders' ownership claims on the company. In Palantir's case, the scale of the stock-based compensation looks uncomfortably high relative to earnings.
Palantir's valuation looks untenable
The worst thing about Palantir is its valuation. With a forward price-to-earnings (P/E) ratio of 208, the company's share price doesn't price in any of its ongoing challenges with potential competition and profitability. The situation doesn't make much sense from a fundamental perspective.
Financial markets aren't always logical. When a company develops a cult following, its valuation can reflect factors outside of strict business performance. That said, the risks of holding Palantir outweigh the potential rewards. And investors who want to make millions in the stock market are likely too late to benefit from this hype train.
