Has there been a bigger artificial intelligence (AI) winner than Palantir Technologies (PLTR 5.20%)? The company has thrived on the accelerating demand for AI software and applications, fueling rabid demand for its stock. Shares are up a whopping 330% over the past year alone.
Recently, the stock has pulled back and is currently about 10% off its high. Is this a buy-the-dip opportunity or the early stages of a bubble bursting?
Palantir has a legitimate runway for years, perhaps decades, of growth. However, much-needed context could impact whether you buy shares. Is Palantir a buy? Let’s find out.
Palantir is emerging as a juggernaut in AI software
Much of the attention on artificial intelligence focuses on generative AI, the companies developing AI models, and the chip companies powering them. However, an entire market exists for organizations and companies that want to apply AI to specific aspects of their work.
That’s where Palantir thrives. The company has a long history of developing custom data analytics software for government entities and enterprises. It took the natural leap into AI software when it launched its AIP platform in mid-2023. Since then, Palantir’s growth has continually accelerated:
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts
Palantir’s software technology is uniquely flexible and applicable to almost anything. The U.S. government is its largest customer and has used it for various applications, ranging from military operations to coordinating the response to COVID-19 during the pandemic. In the private sector, Palantir’s AI software is helping operate hospitals efficiently, optimize supply chains, and much more.
While nobody knows how much Palantir’s revenue growth will continue to accelerate, it’s clear the company could sustain brisk growth for the foreseeable future. Such flexible software means a vast customer base. In that sense, Palantir is only getting started. The company ended Q3 2024 with 629 total customers. There are hundreds of thousands of large enterprises and public organizations worldwide. Even if Palantir works with a few thousand of them over the years, that means multiplying its current user base. Besides, I’d argue that’s probably setting a very low bar.
Individual investors may find it challenging to discern competitive advantages in complex software companies. The fact that the U.S. government has worked with Palantir for over a decade and continues to award it new business speaks volumes about Palantir’s technology and how it stacks up against others.
Why the stock’s recent dip may continue
No matter how great the underlying company is, it shouldn’t be a shock that a stock may cool off after rising 330% in 12 months. This could be a short breather before the stock continues higher, but I’d be careful here.
Palantir’s share price has outpaced the company’s growth, pushing its price-to-earnings ratio to nearly 360. That’s among the highest valuations on the market for any company. While analysts expect strong long-term earnings growth (27% annualized), it’s nowhere near enough to justify such a high price.
PLTR PE Ratio data by YCharts
Palantir’s PEG ratio is a hefty 13. For reference, I generally buy high-quality stocks at PEG ratios up to 2 to 2.5. Even if Palantir grows earnings twice as fast as analysts anticipate, the PEG ratio would still be too high at 6.6.
Is Palantir a buy?
The bottom line is that Palantir will have difficulty meeting the sky-high expectations reflected in its current stock price. The likely outcome is that the stock will dramatically decline to a more reasonable valuation or go nowhere for a long time while the business grows and catches up.
Either way, Palantir is not a buy today.
Remember that stock prices can do funny things, sometimes for longer than you’d expect. However, fundamentals and valuations are like gravity. They pull on a stock harder as prices get further out of line. Palantir’s extreme valuation could last for a while, but gravity always wins eventually.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
