Palantir Technologies (PLTR -0.33%) isn't slowing down. And despite the lofty valuation that makes many investors nervous, this stock won't go away anytime soon, either.
The stock is up 420% in the last 12 months, including 77% so far this year. With a market cap of $317 billion, it ranks as the 29th most valuable company in the world. That's incredible, especially when you remember that at the end of 2022, its market cap was less than $15 billion.
Palantir's run-up was exciting for investors who bought in several months ago -- gains like this don't happen every day. But is there still time for new investors to take a position, or has this ship already sailed?
To answer that question, you have to recognize the difference between valuation and vision -- and decide which is more important to you when you are building your portfolio.
Image source: Getty Images.
A look at Palantir
Palantir's business revolves around highly sophisticated software platforms that are powered by artificial intelligence (AI).
Its Gotham platform is used by governments and defense agencies to manage intelligence, gather information, and identify targets for soldiers in real-time situations. It can operate and send commands to satellites anywhere in the world and gather information from them to send insights back to operators.
Gotham is becoming a must-have platform for the U.S. government and others. Revenue from the U.S. government reached $373 million in the first quarter, up from $257 million a year ago. Government revenue from outside the U.S. grew at a much slower clip, going from $98 million to $114 million.
The company's Foundry platform is used by Palantir's commercial clients. It integrates everything from multiple departments, as well as the company's mission, market position and growth strategies, to help executives make sense of the big picture and act on it. Foundry customers are working in the fields of AI and machine learning, healthcare research, retail, energy, and more.
While Palantir still gets the majority of its revenue from government sources, the commercial side is becoming more profitable. Overall commercial growth was up 33% from a year ago, reaching $397 million. But notably, growth from U.S. commercial clients shot up 71% in the last year, from $150 million to $255 million.
And there is its Artificial Intelligence Platform (AIP), which incorporates large language models into Palantir's AI-powered products for both commercial and government clients. The company launched the AIP platform in April 2023, triggering the stock's massive gains over the last two years.
The bottom line: The company is growing fast, and it still has room to grow, particularly by expanding its government and commercial customer base outside the U.S.
The valuation issue
There are plenty of people, including some of my Motley Fool colleagues, who would say that Palantir's valuation makes it too expensive to buy now. And granted, the valuation is ridiculously high.
For instance, the price-to-earnings ratio, which measures the company's stock price in relation to its earnings, is 584, while its forward P/E (which measures the stock price in relation to its expected future earnings) is 243. Anything over 50 or 60 makes an investor think twice, so by that comparison, those are awful numbers.
And the price-to-sales ratio (P/S), which compares the market capitalization to total revenue, is more than 100. Compare that to another massive market-moving stock, Nvidia, which has a P/S of 26.
While these numbers are huge, I think they should also be expected. The work that Palantir is doing is tremendously expensive, and it is just beginning to scale up. Right now, the company's profit margin is only 18%, but it just became profitable in 2023.
But as I said in a previous article, it is in a unique position. I don't think the market understands or appreciates the true potential of the work Palantir does and how it will change governments and companies around the world.
Management signed 139 deals in the first quarter worth more than $1 million each, and 31 deals worth more than $10 million. Those are numbers that are going to increase -- and I see the stock and market cap continuing to rise.
So, the question to ask is: Are you willing to let a valuation number keep you from buying a great company that is before its time?
Is Palantir stock a buy?
While it's always a mistake to ignore valuation, I think it's equally problematic to make valuation a disqualifying factor. For me, this is a question of valuation versus the extraordinary vision of Palantir's management and the massive opportunity that it has. And for that reason, Palantir is a buy for me.
