The AI juggernaut seems unstoppable so far, but looks can be deceiving.
Let’s be honest: Palantir (PLTR 2.98%) is just too cool. How could that be? The company’s name is straight out of The Lord of the Rings. The name of its flagship product, Gotham, is straight out of a comic book. And its primary goal, using artificial intelligence (AI) to identify and thwart terrorist threats that human agents would have missed, could be straight out of Mission: Impossible. there is.
The company’s stock is up 161% year-to-date, and its AI-based “cool factor” may be part of the reason it’s been attracting investor attention lately. At the end of the day, it’s clear that many investors think AI stocks are quite attractive, but some stocks, such as c3.ai and Super Micro Computer, have failed to live up to high expectations and have fallen sharply recently. Masu. Palantir, on the other hand, has yet to disappoint. But as these other companies have shown, “cool” alone isn’t enough to satisfy investors. Can Palantir’s stock price continue to rise, or is the product already too expensive to buy, no matter how cool it is?
Fast-growing revenue
Palantir’s revenue growth has been surprisingly steady for such a young company, but that doesn’t mean it’s not doing well. In the most recent quarter, revenue increased 55% year-over-year. However, most of its revenue essentially comes from a single customer. The U.S. government provides 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 across agencies’ systems. Masu. Naturally, the more institutions that use Gotham, the more data they can analyze and the better the results. This benefit expansion acts as a competitive moat for the company’s government revenue. Switching from Gotham to the new system requires multiple government agencies to approve the switch and allocate resources to make it happen, which is an expensive and complex process.
In addition to steadily increasing government revenue from Gotham, Palantir is rolling out a number of commercial products for an ever-growing number of corporate customers. The first of these products, called Foundry, works similarly to Gotham, leveraging AI to analyze siled information, in this case within a company’s various departments or business units. The company’s commercial products are popular, and commercial revenue growth is actually outpacing overall revenue growth. In the most recent quarter, Palantir’s commercial customer count grew 83% year-over-year.
Rapid growth in stock prices
Investors started paying attention to Palantir last year, whether because of the company’s impressive growth numbers or its cool factor. The company’s stock price, which was below $6.50 per share in early 2023, is now more than $42 per share, a return of more than 500%. This gives the company a market capitalization of just under $100 billion and trailing 12-month sales of just under $2.5 billion.
This is a very high valuation, even for a fast-growing company. This gives Palantir a price-to-sales (P/S) ratio of approximately 41 times sales. By comparison, even tech giant Nvidia, which is also expected to benefit from continued growth in AI, only trades at about 36 times sales. Other data-related companies are not as highly rated. Datadog’s P/S ratio is just 19x. Snowflake is at 12x, and all three companies have grown revenue faster than Palantir over the past year.
Still buying?
Palantir has recently received a lot of attention due to its inclusion in the S&P 500. This, combined with the cool factor, probably accounts for the high valuation of the company’s stock. Hot growth stocks priced for perfection often see corrections at the first sign of a potential growth slowdown. Datadog and Snowflake are both good examples. At the end of 2021, Datadog’s P/S ratio was above 60 and Snowflake’s was above 100. Unable to maintain these valuations, the stock price declined. I wouldn’t be surprised to see something similar happen with Palantir, as the growth of AI increases potential competition for government AI spending.
That said, as a clear pioneer in the field, and as a company that is experiencing growing demand for its products and appears to be successfully expanding into new markets, Palantir is poised for long-term success. is completed. I like its future growth prospects, even if it takes longer than I would like to justify its high rating.
In conclusion, I would buy Palantir to hold for the long term, but given its extremely high valuation, there are other companies I would buy first. I’ll keep it on my watchlist to reconsider if Palantir’s stock price drops.
John Bromels has held positions at C3.ai, Datadog, Nvidia, and Snowflake. The Motley Fool has positions in and recommends Datadog, Nvidia, Palantir Technologies, and Snowflake. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
