Businesses involved with artificial intelligence (AI) have seen the valuations of their stocks skyrocket over the past year. Investors are bullish on companies that can leverage next-gen technologies to their advantage and that can unlock future growth opportunities.
One company that has been neck-deep in AI has been Palantir Technologies (PLTR 1.65%). Last year, the data analytics company unveiled its AI platform, AIP, which management says has been a big hit with customers. But as promising as the business's prospects appear to be, I wouldn't jump on Palantir's bandwagon just yet.
NASDAQ: PLTR
Key Data Points
Management has been setting a high bar
One thing that makes me wary is when management sets expectations that may be a bit high. That can make it incredibly difficult for the business to surpass expectations and it also means the stock is likely trading at a significant premium as investors are pricing in all that future growth management is talking about that has not yet materialized. And trading at more than 60 times its estimated future earnings, it's clear that is the case with Palantir.
On Palantir's most recent earnings call with analysts, CEO Alex Karp did his part in hyping up the business, saying, "I don't believe in the U.S. commercial market we have competition." Ryan Taylor, the company's chief revenue officer, also said conversions following the company's "boot camps" -- workshops where it helps potential customers figure out how to make use of its products -- were often quick and significant. "We're seeing customers, you know, shortly after boot camp sign seven-figure deals," he said.
The problem is that with such bold claims, investors are going to expect strong results. And while Palantir has been growing, its growth rate has remained relatively steady.
Palantir's growth is strong, but hasn't exactly been taking off
During the first three months of 2024, Palantir's revenue topped $634 million and grew 21% year over year. It's a good growth rate, but when you consider how the business has been doing in recent quarters, it's not a huge improvement.
PLTR Revenue (Quarterly YoY Growth) data by YCharts
The results don't appear to be lining up with the rosy rhetoric, with management talking about having no competition in certain markets and being able to convert customers quickly into big-ticket buys.
The company conducted over 660 boot camps last quarter, and investors should arguably expect a lot more growth if these conversions are indeed happening quickly. Even if the numbers may not be trickling into the business right away, that's what guidance increases are for, to help reflect the company's optimism for what lies ahead.
But the company only modestly raised its full-year guidance in May. Palantir now projects revenue for 2024 to be within a range of $2.677 billion to $2.689 billion. Three months earlier, the forecast range was $2.652 billion to $2.668 billion. Without three decimal places, it would be hard to see much of a bump up in the guidance at all.
While Palantir says it's growing and says customers are seeing value in AIP and are converting, the growth just doesn't appear to be evident in the results or the guidance. And that has me worried that there may be a bit too much hype behind the tech stock and not enough substance to back it all up.
Palantir could be a good investment, but it comes with a fair amount of risk
In the past three months, Palantir's stock has fallen by 11% as the recent quarterly results haven't done much to inspire investors to pay more for what's already an incredibly pricey investment. Between the high earnings multiple and the results that don't appear to be lining up to what management is saying, I'm concerned that more of a sell-off may be around the corner for Palantir's stock.
It still has a lot of potential in the long run to be a good buy, but investors may be better off waiting a few more quarters to see if there is a dramatic improvement in Palantir's growth rate before making a decision on the stock.
