Palantir (PLTR +2.45%) stock has become one of the darlings of the artificial intelligence (AI) industry. The company has long used AI to power its Gotham and Foundry platforms. However, the launch of a new platform has AI investors looking at Palantir in a new light.
Still, the stock's gains have paused since early February, when it was at the mid-$20s per share level. Does this mean investors should buy while it is under $30 per share, or does the stock price behavior mean the rally is over? Let's take a closer look.
Why investors may not want to buy now
The most likely reason investors may not want to buy now is that they think the stock's price has moved ahead of its valuation. The company's stock price has quadrupled since late 2022. Optimism surrounding AI appears to have driven this gain, thereby increasing the stock's valuation.
NASDAQ: PLTR
Key Data Points
Consequently, it has begun to appear expensive by more than one measure. Palantir has only reported a profit for the last five quarters, so investors would likely be right not to worry about a 255 P/E ratio.
Nonetheless, its forward P/E ratio is 70, and it sells for an elevated price-to-sales (P/S) ratio of 24. At such levels, investors might assume the market has priced Palantir for perfection.
Moreover, Palantir has developed a meme stock status in the minds of some investors, increasing the danger the stock price will become detached from its fundamentals. Management may have reacted to the stock's meme-like behavior indirectly. Recently, CEO Alex Karp lashed out at short sellers, a strange reaction when he could use some of the company's recent profits to add shares.
Furthermore, Palantir seems to underperform its expectations from another measure. For 2023, its revenue of $2.2 billion rose 17%, well under the 30% annual growth rate Karp had predicted for the company in early 2022. Still, thanks to profitable quarters, Palantir earned a net income of $217 million, up from a $371 million loss in 2022.
Reasons Palantir stock could continue running
In fairness, investors may have more reasons than the company's recent profitability to start believing in the stock. Despite the increase over the last 16 months, the stock sells at a discount of just under 50% from its all-time high.
Additionally, optimism about its latest product release could mean the run-up in the stock price is not just meme-driven hype. Last year, Palantir launched its generative AI-driven Artificial Intelligence Platform (AIP). The company is promoting AIP through "bootcamps" -- intensive product demonstrations showcasing the tool's capabilities to customers.
As of its earnings release in early February, Palantir had completed 560 bootcamps, and the customer reactions appear extremely positive. According to the company, one attendee felt their company had "100 use cases" for the product, while another boasted of achieving more in one day with AIP than a hyperscaler had in four months.
With such productivity gains, the news that Palantir's customer count grew 35% in a year should not surprise anyone.
Admittedly, a predicted 19% revenue rise for 2024 may not appear to match that growth. Nonetheless, that includes a forecasted 40% minimum increase for U.S. commercial revenue during that time. Hence, AIP is likely emerging as a green shoot that could drive Palantir stock higher over time.
Should I buy Palantir stock while it is below $30 per share?
Given current conditions, how you buy Palantir stock is arguably a more critical question than whether you buy right now. Under current conditions, investors should add shares slowly, if at all. Due to its valuation and the rise of short sellers, the stock could pull back in the near term.
However, AIP is offering customers eye-popping productivity improvements. This makes considerable revenue increases more likely, particularly in its U.S. commercial segment. Assuming Palantir meets such heightened expectations, its bull run can continue, even from current levels.
