Palantir Technologies (PLTR 0.28%) highlights the potential life-changing impacts of stock market investing. If you had invested $10,000 into the data analytics company three years ago, you would have a jaw-dropping $151,000 day -- a return of roughly 1,400%. The benchmark S&P 500 returned a modest 56% over the same time frame.
The company is benefiting from widespread excitement about its software offerings for government and military clients. But is the hype getting ahead of the fundamentals? Let's dig deeper to determine if Palantir's stock still has millionaire-maker potential or if it's time to take profits.
Making sense of Palantir
Palantir operates a software-as-a-service (SaaS) business model that helps organizations maximize efficiency, detect fraud, and gain other insights by examining their internal data. While the company has built its core business over two decades, the introduction of new generative artificial intelligence (AI) functionality in 2023 boosted its systems by enabling real-time insights, particularly in military scenarios.
Palantir has scored a series of contracts with high-profile clients. These include the Ukrainian armed forces, which it currently assists with targeting and plans to help with demining when the war with Russia is over. The company also provides the Israeli Defense Forces with software to support "war-related missions," which likely refers to targeting.
Bringing big tech to the defense industry
Palantir has established itself as a bridge between big tech and the military industry, putting it in a good position to help global armed forces transition to next-generation war-fighting capabilities. The company's economic moat comes from its track record and its willingness to endure controversies that other companies may shy away from. So far, this unapologetic stance has had real financial benefits for the company.
For example, in 2019, widespread employee backlash forced Palantir's rival Alphabet to abandon its work with the U.S. Army's Maven Smart System over alleged ethical concerns. Palantir swiftly took over the project, which currently has a contract ceiling of $1.3 billion through 2029. In April, Palantir also landed a deal to supply the Maven Smart System to the North Atlantic Treaty Organization (NATO), a military alliance of 32 member states across Europe and North America.
Image source: Getty Images.
What is the downside?
On the surface, everything looks great for Palantir. Its business serves a rapidly growing opportunity as armed forces around the world modernize their capabilities. And its trust and resilience to bad press give it an edge that is difficult to replicate among more consumer-facing rivals. That said, a good company isn't always the best long-term investment.
Palantir's main problem is valuation. After soaring 1,400% in three years, the stock has become eye-wateringly expensive. With a price-to-earnings (P/E) multiple of 531, it is likely one of the most expensive stocks on the market right now. For context, the Nasdaq-100 has an average P/E of 31, while AI industry leader Nvidia trades for a relatively modest 45.
Palantir's astronomical price tag would make sense if the company were growing at a high-triple-digit rate, but it isn't. First-quarter results show a business growing at a healthy, but not spectacular, clip.
Total revenue jumped 39% year over year to $884 million, driven by strong demand from U.S. commercial and government clients. To be fair, Palantir's net income more than doubled to $218 million, which may justify some of the optimism. However, with a stock priced for perfection, even the slightest hiccup in growth could lead to a sharp decline in price.
