Palantir (PLTR 1.38%) has been laser-focused on artificial intelligence (AI) since the company's founding. As a result, its AI tools are ahead of many others in its industry, which is why Palantir was ranked No. 1 in a survey of AI, data science, and machine learning platforms by Dresner Advisory Services.
But Palantir's AI tools were mostly government-focused, so getting commercial businesses to adopt its AI tools was critical for expanding into a larger market. This is a cornerstone of the Palantir investment thesis, and after hearing what management said in its most recent earnings call, it's looking like a success story.
U.S. commercial adoption is a key metric to watch
At its core, Palantir's AI program takes in massive amounts of data and delivers recommendations to its users on the most optimal decision. This technology is useful in multiple sectors, whether the government is using it for the military, a hospital is using it for dispatch, or a company is deploying it to manage its supply chain.
Its latest technology, AIP (artificial intelligence platform), is a large language model that allows its users to ask questions to the software. This is another way for customers to deploy Palantir's powerful AI technology and lead them to make the best decisions possible in the moment.
While these products are certainly innovative and fascinating, if they don't sell, then they are a waste of time in the business world. But Palantir is seeing remarkable adoption in the U.S., as discussed in its latest quarterly conference call:
Excluding strategic commercial contracts, it [U.S. commercial business] grew 52% year over year and 19% sequentially, and three-fourths of our quarter-over-quarter growth is from customers that started with us in 2023. Our U.S. commercial customer count rose 12% quarter over quarter and is now ten-fold what it was just three years ago.
That quote, "three-fourths of the quarter-over-quarter growth is from customers that started with us in 2023," truly amazes me. It shows that AI adoption in the U.S. is happening at an incredible rate, which bodes well for a business like Palantir.
But even if the U.S. commercial business is doing well, does that add up to an investible stock?
The stock is very expensive because of its growth rates
Despite the success of U.S. commercial revenue growth, government contracts still make up the majority of Palantir's revenue (55%).Government revenue only grew 12% versus commercial's 23%, leading to an overall growth rate of 17%.
Another key consideration when investing in Palantir is its profitability. In last year's fourth quarter, Palantir posted its first GAAP earnings per share (EPS) profit, and this Q3 marked the first time Palantir delivered EPS greater than $0.01. While Palantir's $0.03 per share profit isn't a ton, it shows the company is committed to increasing its profitability steadily.
Still, with the hype surrounding AI and Palantir's growing profitability, many investors are excited about the stock, which leads to a pricey valuation.
PLTR PS Ratio data by YCharts
No matter how you value the company (earnings or sales), the stock is far from cheap. Furthermore, with Palantir slated to grow revenue by 18% next quarter, it's growing slower than its price-to-sales (P/S) valuation. Usually, companies are growing at least two to three times as fast as their P/S, so this is a concern for me.
While Palantir has a great product and is executing well, I think the stock has gotten too far ahead of itself. As a result, I will pass on the stock for now. I may reconsider if the stock takes a dive due to valuation (and not a business event like slowing sales or a lost contract). But right now, it's just too expensive to purchase unless growth picks up.
