Palantir (PLTR +3.37%) is one of the most popular artificial intelligence (AI) software investments. Its prowess in the space is noticeable, and it comes from a superior product and years of experience deploying AI.
However, not every successful company is a good investment. Sometimes, the expectations are just too high and the stock can't rise. But does Palantir fall into this category, or is the stock set to gain even more? Let's find out.
Palantir's AI products are seeing huge demand
While some companies may offer cookie-cutter AI platforms, Palantir does not. Its product allows clients to build AI solutions to help them make business decisions specific to their needs.
This specialty preference arose from Palantir's founding when it was a tool utilized by government agencies like the Department of Defense. Government contracts are still a large chunk of Palantir's business, making up $324 million of its total $608 million in fourth-quarter 2023 revenue. However, the company's current growth is in the commercial space, where revenue rose 70% year over year.
NASDAQ: PLTR
Key Data Points
The big reason for the rise? Palantir's Artificial Intelligence Platform (AIP for short). AIP allows Palantir to integrate large language models (LLM) into a business and is the same technology behind generative AI platforms like ChatGPT or Alphabet's Google Gemini. The problem with utilizing these platforms is that data put into those models becomes available to the creator's company. Many clients don't want or can't have their information shared, so this becomes an issue.
Additionally, integrating LLMs into internal systems isn't simple, so deploying a tool like AIP helps with that.
The response to AIP has been incredible; Chief Revenue Officer Ryan Taylor had this to say about AIP in Palantir's Q4 conference call: "I've never before seen the level of customer enthusiasm and demand that we are currently seeing from AIP in U.S. commercial."
That's high praise for a single product, but does it translate into a stock worth owning?
Investors must pay a high premium to own Palantir stock
Overall, Palantir's business is doing great, but it's not lighting the world on fire as some might expect. Total revenue rose 20% year over year in Q4 and is expected to grow by 17% throughout 2024.
Despite that, the stock trades for a massive premium.
PLTR PS Ratio data by YCharts
Twenty-six times sales is a huge premium to pay, especially for a stock that is expected to only grow in the high teens this year. While many investors aren't as familiar with the price-to-sales ratio, if you gave Palantir a 30% profit margin, it would trade for 87 times earnings. For comparison, CrowdStrike, a cybersecurity software company, trades for 25 times sales and is expected to grow revenue by 29% in fiscal-year 2025 (ending January 2025). Snowflake, a software company integral to AI because of its data cloud software, can be had for 19 times sales and expects 22% product revenue growth (in FY 2025, ending January 2025).
While Palantir is succeeding as a company and rolling out its various products, there's a lot of fluff in the stock. I won't be surprised to see Palantir's business succeed over the next few years, but its stock may have difficulty rising because of the lofty expectations built into it.
I'd much rather buy CrowdStrike or Snowflake. They are still expensive stocks, but at least they're growing faster than Palantir while trading at a cheaper premium.
So is Palantir's stock the best AI stock available? I'd say no. Investors should look elsewhere for much better deals.
