After a rise of more than 100% in 2024, Palantir Technologies (NYSE: PLTR) is finally getting Wall Street’s attention. The data analytics company has benefited from a surge in excitement around its new generative artificial intelligence (AI) tools. And it will join the benchmark S&P 500 index this month, showing that it is becoming increasingly relevant to the market.
Let’s dig deeper to see if it’s a good idea for new investors to invest in this high-growth stock now.
Is AI software ready for the mainstream?
Since the launch of OpenAI’s ChatGPT in late 2022, generative AI-related shares have generated billions, if not trillions, in shareholder value. Howeverso farMost of the operating momentum has been limited to hardware giants like Nvidia, which saw its revenue more than double in the second quarter on the back of sales of graphic processing units (GPUs) needed to run and train these advanced algorithms.
While the software side of the AI industry has seen relatively less success, Palantir could change this dynamic by introducing the technology to critical military customers and intelligence agencies that need to stay one step ahead of their adversaries.
The company has developed its Artificial Intelligence Platform (AIP), which is designed to synergize its existing data mining tools with AI large language models (LLMs) to provide real-time insights into high-stakes combat scenarios for the U.S. and its allies. Palantir is also courting private sector companies through its data analytics platform Foundry (its government-focused platform is called Gotham).
Business momentum looks good
Palantir’s rising stock price is consistent with healthy business momentum. In the second quarter, total revenue grew 27% year after year to $678 million. While the company is best known for its high-profile government contracts, private sector work is becoming increasingly important as part of its business model.
Palantir’s private sector customer base grew 83% to $295 million in the second quarter, and segment revenue rose 55% to $159 million (about 23% of total revenue). While this remains a relatively small part of Palantir’s business, its growth will be welcome news for investors.
Unlike government contracts, which can be blocky and inconsistent, commercial contracts are software as a service (SaaS) revenue is designed stable and recurring. This characteristic will make Palantir easier to predict and value. It also provides welcome diversification and suggests that the company is good enough to compete in a terribly busy field.
Palantir’s final conclusion Also remains buoyant, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rising 39% to $261.6 million. However, that metric adds a whopping $141.8 million in stock-based compensation.
Paying employees with stock can help young companies motivate their staff and conserve cash reserves, but it comes at the cost of diluting current shareholders’ claims on future profits. So investors have to weigh the trade-offs.
Palantir also has its challenges
Excessive stock compensation isn’t Palantir’s only problem. As previously mentioned, the company’s push into private sector SaaS deals puts it in a crowded industry where it will compete with other data analytics software giants like Amazon And Microsoft.
While Palantir is a economic canal in government contracts because of the long-term relationships and the resistance to external pressure. It is unclear to what extent these advantages are also applicable to work in the private sector.
Palantir’s mega-cap rivals likely have more money to spend on research and development (R&D) and customer acquisition. And they have stakes in leading AI companies like OpenAI (a Microsoft partner) and Anthropic (an Amazon partner).
Given these challenges, Palantir’s forward price-earnings (P/E) ratio appears to be 88. far too optimistic. And I don’t see the company growing to this rich valuation any moment soon.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long Jan 2026 $395 calls on Microsoft and short Jan 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Is Palantir a Good Artificial Intelligence (AI) Stock to Buy Now? was originally published by The Motley Fool
