Palantir (PLTR -0.62%) has been a much-debated battleground stock since its initial public offering (IPO) a little more than two years ago. While many bulls remain steadfast in their expectations that the stock will go on to deliver incredible long-term performance, thus far, it's the bears winning the valuation argument.
The data analytics specialist's share price has fallen roughly 16% since market close on the day of its IPO, fallen 56% across this year's trading, and is down 80% from its lifetime high.
Will Palantir's stock bounce back and go on to deliver market-crushing returns, or will it continue to fall from current levels and wind up disappointing investors? Read on to see why two Motley Fool contributors come down on opposite sides of the bull versus bear debate surrounding Palantir.
Palantir could be scratching the surface of a huge opportunity
Keith Noonan: High-performance data analytics software will only become more important for government organizations, institutions, and businesses. Palantir is positioning itself as a long-term beneficiary of this trend, with its Gotham software providing data-based operating system tools and functionality for government customers and its Foundry software providing similar offerings for enterprise customers. The company's Apollo platform for deploying new software, maintenance, and security updates also appears to be emerging as a new business pillar.
Winning government contracts tends to be difficult -- even more so when it comes to crucial technologies that play key roles in national defense. Palantir's success in the public sector speaks to the dependability and value of its software, and the company also appears to be just scratching the surface of its potential in the commercial market.
While sales growth for the company's government customer segment slowed to 13% year over year last quarter, sales to U.S. business customers increased 120% year over year and helped push overall commercial revenue up 46% compared to the prior-year period.
Palantir continues to find success when it comes to attracting new customers and closed out Q2 with 304 total customers -- good for a roughly 80% year-over-year increase. The company's usage-based billing model and land-and-expand customer approach could lay the foundations for a powerful long-term growth engine if the company's strategic initiatives come to fruition.
Palantir aims to make Foundry the go-to platform for building and running artificial intelligence (AI) and analytics-focused applications, and the company has drawn explicit comparisons to Amazon Web Services (AWS) when it comes to that opportunity. Per the company, "What AWS was in the last decade, Foundry will be in the next."
Whether Foundry ever comes close to being that influential remains to be seen, but it's a comparison that helps put Palantir's path forward in context. The company could crush the market's expectations if its software plays a leading role in the evolution of AI and analytics applications.
Don't mistake the company for the stock
Lou Whiteman: Palantir, the business, is the envy of the government services sector. The company's software has the ability to do things that would-be rivals simply cannot. The promise of the technology fueled the stock's 300% surge in the months following its late 2020 IPO, but in the quarters that followed, the stock came crashing down to Earth.
For all that promise, it is hard to call Palantir stock a bargain even after the decline. The stock still trades at more than nine times sales, significantly above the multiple assigned to defense IT rival Booz Allen Hamilton.
Bulls would note Palantir has a larger commercial business than Booz Allen, and indeed commercial has the potential to grow faster than government and help to justify that premium. But government still accounts for more than half of total revenue. It will take years for Palantir's business to resemble a commercial-focused company like Snowflake, and it's possible it will never happen.
There is also some evidence that growth is not materializing as fast as Palantir bulls had hoped. Last quarter, the company scrapped its 30% sales growth target. And stock-based compensation totaled $1.8 billion in the 12 months ending June 30, eating deeply into results.
Palantir is too good of a business to just disappear, but there is nothing in the results from 2022 that would suggest the company will be able to meet the ambitious goals the market has set. That's the formula for a stock stuck in neutral, not a market beater over the next few years, and investors would be wise to look elsewhere.
Should you buy Palantir stock?
Even after some precipitous sell-offs, Palantir remains a somewhat speculative stock. The company still has a growth-dependent valuation, charting its business outlook involves a significant amount of guesswork, and management's heavy reliance on stock-based compensation to fund operations raises the risk of continued dilution. Accordingly, Palantir stock probably isn't a great fit for most risk-averse investors.
On the other hand, the company has built an early leadership position in its corner of the data analytics industry, and it has some intriguing strengths that could help power impressive performance over the long term. Palantir's growth-dependent valuation sets the stage for volatile trading in today's turbulent market, and the company will have to prove it can live up to its lofty ambitions. But it's possible that the stock will serve up eye-catching returns for investors who are willing to embrace its risk profile.
