Palantir (NYSE:PLTR) is one of the hottest artificial intelligence (AI) stocks this year. As of this writing, the stock is up about 280%, far exceeding many investors’ expectations.
However, this run-up isn’t entirely due to the company’s booming business, as the price investors are willing to pay for its performance has risen as much as its share price. This has caused the stock to do something it hasn’t done since 2021, and investors should pay attention.
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Palantir’s AI software has become a huge hit because the company has years of expertise in this area that its competitors don’t have. Palantir’s platform was initially tailored for government use, allowing the software to take in massive amounts of information, process it quickly, and then provide insight into next actions.
This general concept is also useful for commercial companies, so Palantir eventually expanded this direction. As of the third quarter, government activities are still larger than the commercial side, but a fairly even distribution is starting to emerge, with government revenues accounting for 56% of the total.
The latest surge in demand for AI has benefited Palantir immensely, as more and more customers look for ways to integrate AI into their daily operations. This has a double effect for its customers. First, Palantir can automate some repetitive tasks that an employee might perform manually. Second, the employees who make decisions based on this information can be better informed because it reaches them in real time.
All of this has caused Palantir’s product revenue to soar, rising 30% year over year to $726 million. The US in particular sees more demand than the international side. U.S. commercial revenues increased 54% year-over-year to $179 million, and U.S. government revenues increased 40% year-over-year to $320 million.
International sales are of great importance to Palantir, as they account for approximately one-third of its revenue. While this part of the business isn’t necessarily “weak,” it just hasn’t seen the AI race that the US has. Once the international customer base starts catching the same AI fever as the US, Palantir’s growth could accelerate even further.
With that information alone, you might be tempted to make a significant bet on Palantir stock. However, what Palantir recently did for the first time since 2021 is not good, and it could end in disaster for Palantir investors.
With Palantir’s stock price up 280% this year and revenue only up about 30%, there’s a clear disconnect between business growth and stock growth. Investors are now willing to pay more for Palantir’s business, sending its valuation soaring.
From a price-to-sales (P/S) perspective, Palantir now trades for almost 60 times sales.
The last time Palantir traded this high was in 2021, and the stock didn’t do well until more than two years later. When Palantir reached its peak valuation in February 2021, the stock fell about 80% from its all-time high.
It had nothing to do with the company as sales continued to grow during that period.
This highlights an important reality for investors: Even as Palantir’s business grows, its stock price could still fall.
Few companies have ever traded at 50 times sales and been a winning investment. That level of expectation is so high that only companies that double or triple their revenue year after year can justify it. Palantir’s revenue growth is only in the 30% range. While that is by no means slow growth, it is much less than Nvidia saw during his big run.
While Nvidia has tripled its revenue year after year for several quarters in a row, it has never traded at more than 45 times revenue.
Yet Palantir, which is growing much more slowly, does.
This isn’t true, and investors who own Palantir stock should be careful. History may not repeat itself, but it often rhymes. Palantir is a very expensive stock that isn’t delivering the results it needs to justify its valuation. Unless revenue doubles or triples in the near future, the company’s bubble may burst.
It may take months or even a year, but if Palantir maintains standard growth rates at its current valuation, the results won’t be pretty and investors could suffer losses like they did in 2021 and 2022. .
So what should investors do? I don’t think you need to sell every share of Palantir if you think it can go higher, but at least take some profit off the table. That way you still got some profit from this last run.
Consider the following before purchasing shares in Palantir Technologies:
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Keithen Drury has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Palantir’s Stock Just Did Something It Hasn’t Done Since 2021 Originally published by The Motley Fool
