Palantir (PLTR 1.66%) is usually listed among the top artificial intelligence (AI) stocks in the market. It's been doing AI for a long time. Palantir was founded in 2003 as an AI platform specifically catered for government use. However, Palantir has since expanded upon that initial goal to more commercial-focused products.
Because of Palantir's AI history, many assume it's one of the best AI investments to make right now due to a strong foothold in the industry. But is that really the case? Let's find out.
Palantir has both government and commercial products
Although Palantir broadened its scope to include non-government products, it is still quite dependent on these contracts. In the second quarter, government revenue comprised 57% of the total and grew quicker than commercial revenue. It's not hard to understand why that's the case, as commercial companies are being more cautious with spending due to what many believe is an impending recession. The government doesn't need to focus on its profitability metrics, so it continues to spend like it always does.
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But what exactly does Palantir do for the government that makes it a vital product?
Palantir's platform is simple to describe. Basically, it's data in, insight out. The United Kingdom utilized Palantir's platform to process visa applications for displaced Ukrainians due to the war and resettle over 120,000 within the U.K. Palantir also recently won a contract worth up to $250 million with the U.S. Army to develop various AI tools to help streamline its combatant operations and intelligence capabilities.
The same platform can also be utilized in the commercial space to perform tasks like supply chain analysis and inventory management and to manage hospital operations. If you have data and a need to make quick decisions, Palantir is a top platform. In fact, Forrester named Palantir a leader in the AI/machine learning platform space, with Palantir capturing the title of strongest current offering among all players. With independent research companies giving Palantir the nod over some top competition, it's a huge competitive advantage when potential clients assess their options.
Still, the finances and stock valuation need to make sense for a company to make a good investment.
Palantir's revenue growth leaves more to be desired
With all of the hype around artificial intelligence plus Palantir's top-notch offering, you'd think the company would be growing at warp speed, but you'd be wrong. In Q2, Palantir's revenue grew at a 13% clip to $533 million, with government revenue growing at a 15% pace and its commercial division at a 10% clip.
While that's faster than the market pace, it's still not as rapid as you'd expect from a hyped-up growth company.
Fortunately, Palantir's management recognizes that and has taken the company to profitability, as it has posted three consecutive quarters of generally accepted accounting principles (GAAP) profitability. But, the faster growth may be coming.
For the third quarter, management projects revenue of about $555 million, indicating 16% year-over-year growth. Investors will be keeping a close eye on fourth-quarter guidance to see if this trend continues, but Wall Street analysts expect it will. For 2024, the average analyst expects 19% revenue growth, so the AI trend will benefit Palantir.
As for valuation, Palantir isn't the cheapest stock around.
PLTR P/S Ratio data by YCharts.
At 17 times sales and 71 times forward earnings, Palantir's stock has high expectations built into it. But, with the price-to-sales (P/S) ratio nearly equal to the company's growth rate, it's a hefty premium to pay to own Palantir's stock.
While business is picking up and Palantir's product offering is incredibly strong, its growth doesn't justify its valuation. As a result, I think investors should continue looking at other AI stocks, as there are several of them available at attractive prices.
