The current dominance of Palantir Technologies appears formidable, yet appearances can be misleading.
Palantir Technologies (PLTR), known for its intriguing appeal, derives its name from The Lord of the Rings. The flagship product, named Gotham, resembles a concept from a comic book, and the company’s primary goal is to utilize artificial intelligence (AI) to detect and prevent terrorist threats that might otherwise elude human detection, a mission reminiscent of Mission: Impossible.
The company’s stock has increased by 161% year to date, a rise partly attributed to its AI-driven appeal. While many investors find AI stocks attractive, companies such as C3.ai and Super Micro Computer have recently fallen short of expectations, impacting their stock performance. In contrast, Palantir has not yet disappointed investors. However, as demonstrated by these other companies, the appeal alone is insufficient to sustain investor interest. The question remains whether Palantir’s stock price can continue to rise or if it has become overpriced despite its appeal.
Palantir’s revenue growth has been impressive for a relatively young company. In the most recent quarter, revenue increased by 55% from the previous year, with the U.S. government generating 75% of the company’s revenue. Palantir’s Gotham software is utilized by various U.S. defense and intelligence agencies to access and analyze data across siloed systems comprehensively. This creates a competitive moat around the company’s government revenue stream. A switch to a new system would require approval and resource allocation from multiple agencies, a costly and complex endeavor.
In addition to government revenue, Palantir has introduced several commercial products for its expanding corporate customer base. The first product, Foundry, also employs AI to analyze siloed information within different departments or business units. Palantir’s commercial products have gained popularity, with commercial revenue growth surpassing overall revenue growth. The company’s most recent quarter showed an 83% increase in the commercial customer count year over year.
Investors began to take note of Palantir due to its significant growth figures and appeal. At the beginning of 2023, the company’s stock price was below $6.50 per share but has since risen to over $42 per share, a return exceeding 500%. This gives Palantir a market capitalization nearing $100 billion with a trailing-12-month revenue of just under $2.5 billion.
Even for a rapidly growing company, this is a high valuation, reflected in a price-to-sales (P/S) ratio of approximately 41 times sales. In comparison, Nvidia, another tech giant expected to benefit from AI growth, trades at around 36 times sales. Other companies in the data sector, such as Datadog and Snowflake, have much more modest valuations, with P/S ratios of 19 and 12 times, respectively, despite their faster revenue growth over the past year.
Recently, Palantir has garnered significant attention after being added to the S&P 500. This inclusion, along with the company’s appeal, likely contributes to the stock’s high valuation. Growth stocks priced for perfection often experience corrections when growth decelerates, a phenomenon observed with Datadog and Snowflake. At the end of 2021, Datadog and Snowflake’s P/S ratios were over 60 and 100, respectively, leading to a drop in their stock prices. A similar scenario could unfold for Palantir as AI growth enhances competition for government AI contracts.
As a pioneering force in this sector with rising demand for its products and successful market expansion, Palantir seems well-positioned for long-term success. Although it may take time for Palantir to justify its lofty valuation, its growth prospects appear promising.
In essence, while Palantir might be a worthwhile investment for the long term, its current high valuation suggests prioritizing other investment opportunities. Palantir will remain on a watch list, with reconsideration if the stock price declines.
