What happened
Palantir Technologies (PLTR -3.12%) has been a momentum stock since it first went public during most of its two and a half years as a public company. In May, the company found itself in the center of the hottest trend in investing, and the stock shot higher.
Shares of Palantir gained 89.8% in May, according to data provided by S&P Global Market Intelligence, as investors flocked toward stocks that are involved in artificial intelligence.
So what
Palantir makes proprietary data analytics tools for government and corporate customers. It debuted on the public markets in 2020 to great fanfare, backed by venture capitalist Peter Thiel and boasting successes that included helping the U.S. government track down Osama bin Laden.
The stock was an overnight success, climbing nearly 300% in its first few months, before slowly giving back those gains and more as investors began to worry about future growth rates.
In May, the company was in the spotlight once again. Early in the month, earnings came in ahead of expectations, and the company's software expertise made it a natural for investors who are bidding up shares of various artificial intelligence-related stocks.
Post-earnings, the momentum continued as prominent investors including Cathie Wood added to their Palantir positions, getting the market excited about the stock again.
Now what
Palantir has fascinating potential, but too often during its time as a public company, excitement about that potential has become disconnected with the realities of today. Investors need to be worried that has happened once again with this rally.
The company today trades at 15 times sales, meaning that there is a lot of future growth priced in. But the company's guidance for the current quarter, revenue of $528 million to $532 million, is actually below the $536 million Wall Street had been expecting pre-earnings.
Government revenue, which tends to grow at a slower pace than commercial, remains more than half of the total pie. Palantir is working to build its commercial presence, but that will take time, and until it does, there are limits to the amount of growth investors should expect.
Palantir still trades at a discount to commercial-focused data companies like Snowflake, but at a significant premium to government IT specialist Booz Allen Hamilton's 1.5 times sales valuation. The truth for Palantir likely lies somewhere in the middle, which suggest that if the momentum fades, fundamentals might not be able to propel this stock higher from here.
