Palantir stock is trading near all-time highs.
Data analytics software company Palantir Technologies (PLTR -2.23%) has experienced many ups and downs since going public in late 2020. Immediately after the IPO, Ark Investments CEO Cathie Wood frequently watched financial news programs touting Palantir’s potential. Unsurprisingly, stock prices soared.
However, this rise to the top of the software field did not last long. The next few years were tough for Palantir, as enterprise software in general saw slower growth due to a troubled economy. By early 2023, Palantir’s stock price was just $6.
However, the technology sector has seen a sharp recovery over the past year and a half due to increased interest in artificial intelligence (AI). Palantir is benefiting from AI tailwinds, and investors are energizing the stock. Since January 1, 2023, Palantir stock has soared 575%.
Below, we take a deeper dive into Palantir’s $43 stock price and analyze whether the current stock price is too high.
What’s driving Palantir stock price higher?
Given Palantir’s stock has risen so dramatically, it’s natural to wonder what catalysts are driving the stock price higher. Connecting stock market movements purely to demand for AI services is insufficient to explain them.
Here are five core ideas that I think are driving Palantir stock to new highs.
1. Revenue Acceleration: The chart below shows Palantir’s quarterly revenue growth since going public. The company’s sales have been steadily increasing, but there are a few notable periods.
From 2021 to 2023, Palantir managed to grow its revenue, but in an inconsistent manner. As the graph shows, some investors have doubts about Palantir’s potential, and there have been some notable periods of prolonged growth.
PLTR Revenue (Quarterly) Data by YCharts
However, in early 2023, the slope of the earnings line started to become quite steep. This is no coincidence. The company released its fourth major software suite, Palantir Artificial Intelligence Platform (AIP), in April 2023. Since its release, Palantir’s growth has started to accelerate again.
So far, AIP has been a success for Palantir, but it’s not the only thing contributing to the company’s growth.
2. Use Case: For most of its history, Palantir has relied primarily on government contracts, particularly with the U.S. military and adjacent agencies. With the advent of AIP, this dynamic has changed dramatically.
To help market the AIP release, Palantir hosted an immersive seminar where business leaders could demo the company’s product. The idea is to identify use cases for companies to leverage Palantir’s AI software.
This approach has been a huge hit so far. In recent years, Palantir has diversified its business and is currently experiencing significant growth in the private sector.
Image source: Investor Relations.
3. Profitability: Acceleration of sales and successful penetration of commercial enterprises have led to expanding operating margins and stable profitability for Palantir.
Achieving consistent profitability has qualified Palantir for inclusion in the S&P 500. The company officially began trading as a member of the S&P 500 in September, which I think supports the company’s long-term prospects. In other words, if Palantir’s growth was solely due to the AI boom, it probably wouldn’t have been included in the index.
4. Institutional Buying: Becoming a member of the S&P 500 is an admirable milestone. But I think the real tailwind of being part of the index is that more institutional investors may consider taking a position in Palantir.
5. Partnerships: The last idea I want to touch on is Palantir’s relationships with major technology companies. Earlier this year, the company entered into strategic partnerships with AI giants Microsoft and Oracle. Additionally, the company remains a core player in the public sector, a particularly lucrative opportunity as AI becomes a more integral part of defense technology.
Image source: Getty Images.
What do the ratings suggest?
All of the above factors suggest that Palantir has a bright future, but it’s essential that investors carefully consider the valuation fundamentals.
Palantir currently trades at a price-to-earnings ratio (P/E) of 256. Frankly, this is so high that it’s not a good metric. The bigger idea here is that even though Palantir is finally profitable, the company’s net income is still fairly small.
While Palantir has some catalysts that could help it grow its earnings, I think it’s fair to say that the P/E ratio is disconnected from the current fundamentals of the business. Additionally, Palantir’s valuation expansion is undeniable when compared to other AI SaaS (Software-as-a-Service) competitors on a price-to-sales (P/S) basis.
PLTR PS Ratio Data by YCharts
Is Palantir stock too expensive?
My honest opinion on Palantir is that the stock is a little overbought at the moment. While I’m a bull and currently own the stock myself, investors should be cautious when buying opportunities with significant momentum.
A lot of things will have to happen for Palantir stock to get back to $6. But with that said, is a 20% drop likely to happen? surely.
At the end of the day, whether you buy the stock now or wait for a more reasonable valuation is purely your preference. Above all, keep in mind that trying to time the best time to buy stocks is unrealistic.
Instead, you should think about the long-term secular tailwinds driving specific market themes and do your best to identify which companies will emerge as winners. For me, Palantir fits these criteria from an AI perspective.
It’s important to remember that growth stocks have a lot of volatility, and no company is immune to macroeconomic influences. I still believe in Palantir, but I think buying at this price requires the knowledge that you are investing at a premium valuation. That’s not a bad thing in and of itself, but investors need to think about this opportunity long-term.
