Let’s be honest: Palantir (NYSE:PLTR) is irresistibly cool. How could it not? The name of the company comes straight out The Lord of the Rings; the name of the flagship product, Gotham, comes straight from a comic book; and its primary purpose – using artificial intelligence (AI) to identify and stop terrorist threats that would have been missed by human agents – could come right out of the blue. Mission: Impossible.
The stock is up 161% year to date, and that AI-based cool factor is likely one of the reasons it’s caught investors’ attention lately. After all, many investors clearly think AI stocks are quite attractive, but some – looking at you, c3.ai And Super microcomputer – have recently plummeted as they failed to meet high expectations. Palantir, on the other hand, has not yet disappointed. But as these other companies show, cool alone won’t keep investors happy. Can Palantir’s stock price continue to rise, or is it already too expensive to buy, no matter how cool it is?
Palantir’s revenue growth has been surprisingly stable for such a young company, but that doesn’t mean it hasn’t been strong. In the most recent quarter, sales increased 55% compared to the previous year. However, the bulk of that revenue comes primarily from a single customer: the U.S. government, which accounts for 75% of Palantir’s current revenue.
Palantir provides its Gotham threat management software to numerous U.S. defense and intelligence agencies, allowing Gotham to access and comprehensively analyze siled data from the agencies’ systems. The more agencies use Gotham, the more data it can analyze and the better its results become. This scaling of benefits serves as a competitive tool for the company’s government revenues. Moving from Gotham to a new system would require multiple agencies to approve the switch and allocate resources to make it happen, which would be an expensive and complex process.
In addition to steadily increasing government revenue from Gotham, Palantir has rolled out a number of commercial products for its growing number of corporate customers. The first of these products, called Foundry, works similarly to Gotham and uses AI to analyze siled information – in this case within different departments or business units of a company. The company’s commercial products are popular; commercial revenue growth is actually greater than total revenue growth. In the most recent quarter, Palantir’s commercial customer base grew 83% year over year.
Whether it was because of the company’s impressive growth numbers or its cool factor, investors started taking notice of Palantir last year. The company’s stock price, which was below $6.50 per share in early 2023, is currently above $42 per share – a return of more than 500%. That gives the company a market capitalization of just under $100 billion, while revenue over the last twelve months is just under $2.5 billion.
That’s a high valuation, even for a fast-growing company. It gives Palantir a price-to-sales (P/S) ratio of about 41 times sales. By comparison, even tech giant Nvidiawhich is also expected to benefit from continued AI growth, only trades at around 36 times sales. Other data-related companies are not nearly as highly valued. Data hound has only a P/S ratio of 19 times. Snowflake is at 12 times, and all three have grown their revenue faster than Palantir over the past year.
Palantir has received a lot of attention lately as a result of its addition to the S&P500. That – plus the cool factor – likely contributes to the stock’s high valuation. Popular growth stocks priced for perfection often see a correction at the first sign of a potential slowdown. Datadog and Snowflake are both good examples. At the end of 2021, Datadog’s price-to-earnings ratio was over 60, and Snowflake’s was over 100. They were unable to sustain these valuations and their stock prices plummeted. I wouldn’t be surprised if something similar happened to Palantir, as the growth of AI allows for potential competition for government AI spending.
That said, as a clear pioneer in this space, and as a company that appears to be experiencing rising demand for its products and is successfully expanding into new markets, Palantir is poised for long-term success. I like the prospects for future growth, even if it may take longer than I’d like for it to justify its lofty valuation.
In short, I would buy Palantir to hold for the long term, but given its sky-high valuation, there are other companies I would buy first. I’ll keep Palantir on my watchlist to reconsider if the stock price drops.
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John Bromels has positions in C3.ai, Datadog, Nvidia and Snowflake. The Motley Fool holds and recommends positions in Datadog, Nvidia, Palantir Technologies, and Snowflake. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
Palantir shares are up 161% this year. Is it too expensive to buy? was originally published by The Motley Fool
