Sometimes, the market has an extreme reaction to news about a company. This occurs because investors have new information about how a business might perform in the future, causing owners to change their opinion on how much their shares are worth.
This happened with Palantir Technologies (PLTR 3.73%) after it reported better-than-expected earnings on Feb. 5, which sent the stock up 30% the next day. Obviously, it would be nice to go back and buy shares before the movement, but that's not possible. Instead, investors want to know if that price movement has caused Palantir to become too expensive to buy.
So, has Palantir gotten too expensive? Let's find out.
Palantir's latest product is seeing unprecedented demand
Palantir is an artificial intelligence (AI) company that provides tools for the government to utilize AI to process data and provide actionable insights.
While this initial business was and still is successful, Palntir saw an opportunity for its products on the commercial market and expanded its reach. This expansion has proven a fantastic business decision, as the latest AI adoption trend has provided monster growth to the company
In the fourth quarter, Palantir's commercial customer revenue rose 32% year over year to $284 million. Compared to government growth of 11% to $324 million, commercial revenue is much stronger. This shouldn't surprise investors, as commercial clients are more agile in adopting AI than government entities.
Within the commercial customer cohort are U.S. clients, who bought into AI more than any other group. U.S. commercial revenue was up 70% year over year, with customer count rising 55%. That's a significant rise, mainly coming from one product.
Palntir's AIP (artificial intelligence platform) gives clients secure access to large language models (LLMs). This AI platform powers generative AI models (like ChatGPT and Google Gemini), but many companies and governments are nervous about inputting information into these models for fear of their data being given to an outside source.
With Palantir's products, customers can rest easy as their information stays entirely within their confines. This allows clients to build custom generative AI models, which can automate processes or give users up-to-date information to make the best decision.
Chief Revenue Officer Ryan Taylor has been with the company for 14 years and said on the Q4 earnings call that demand for AIP is unlike anything he's ever seen. Despite its strong growth, he also believes the company has barely touched the addressable market, so there's a lot of room for upside.
AIP is taking the business world by storm, and with governments likely to adopt this technology soon, there's a lot of upside ahead for Palantir.
But is it enough to offset the valuation?
The stock has a massive premium attached to it
Palantir isn't a fully mature company, even though its profit margins have sustainably improved over the past year. As a result, I'll use its revenue to value the company using a price-to-sales (P/S) ratio.
Palantir's stock is incredibly expensive at 25 times sales, although it's still cheaper than where it was three years ago when the market was highly valuing software companies.
PLTR PS Ratio data by YCharts
But that's not a fair comparison, especially considering interest rates are no longer at zero. Additionally, management expects full-year revenue to be about $2.66 billion -- indicating 19% growth. With Palantir's P/S ratio much higher than its growth rate, that should raise some red flags about the stock.
While I'm bullish on Palantir's business expansion due to its incredible product line and customer diversity, the stock concerns me. Some high multiyear expectations are baked into the stock, which may be difficult to achieve.
However, if Palantir continues to meet these sky-high expectations and stays on its heavy growth trend for many years (more than three), then the stock may still look attractive here.
Palantir's stock is expensive -- there's no doubt about that. But it results from strong performance and heavy tailwinds propelling the stock higher.
