Palantir Technologies (PLTR 2.13%) is one of the most talked-about artificial intelligence (AI) stocks on the market. Its software plays a central role in helping governments and enterprises turn complex data into actionable insights -- and more recently, it doubled down on its AI strategy with the launch of its Artificial Intelligence Platform (AIP).
With a strong brand and a mover advantage, the company seems positioned to benefit from the broader AI wave. However, beneath the compelling narrative, investors should keep a close eye on the fundamentals, as a few red flags could limit Palantir's upside if not addressed over time.
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Red flag No. 1: Revenue concentration is still a major risk
Palantir's roots lie in government work -- and that legacy continues to define much of its business today. As of Dec. 31, 2024, 55 % of the total revenue was derived from government contracts, primarily with the U.S. Department of Defense and the intelligence community.
These are large, sticky, and mission-critical deals -- but they also come with risks. For one, government spending is inherently cyclical and subject to the shifting winds of politics. A change in priorities or budget constraints could delay contract renewals or result in reduced spending. That's not a theoretical concern -- it has happened in the past and will likely continue in the future.
Even more importantly, Palantir's total addressable market (TAM) serving the public sector is largely capped. Particularly, only a narrow group of allied nations, primarily in North America and Europe, can realistically use its software in the national security context. That places a natural ceiling on the company's government revenue growth runway.
Add to that customer concentration, and the picture gets even more constrained. In 2024, the average revenue for the top 20 customers in Palantir was $64.6 million, totaling $1.3 billion, or 45% of its 2024 revenue of $2.9 billion. With such a high level of dependence on a few large customers, losing one or two of these key clients could have a material impact on growth and profitability.
Palantir is trying to change this with its concerted effort to scale its commercial business. For instance, in the first quarter of 2025, U.S. commercial business grew 71% year over year, outpacing the U.S. government's revenue growth of 45%. The rapid adoption of AI and the launch of AIP could help the company grow its commercial adoption and reduce overall revenue concentration over time.
However, until this shift is fully realized, revenue concentration remains one of the biggest risks for long-term investors.
Red flag No. 2: AI narrative is running ahead of fundamentals
Palantir's AIP platform is a significant part of why investor interest has soared. The idea is compelling: Allow companies to deploy intelligent agents trained on their proprietary data in a secure, controlled environment. It's a differentiated pitch, and one that aligns well with how enterprises are likely to adopt AI.
So far, early indicators confirm that the tech company is on the right path. It grew its customer count by 43% to 711. It also increased the total commercial remaining deal value, which represents deals signed but not yet converted into revenue, by 47% to $3.1 billion, thanks to a record-setting $803 million deal closed in the U.S. commercial contract market in the fourth quarter of 2024.
But here's the catch: While there are good reasons to be optimistic that this growth trajectory could continue, the reality is that groupwide revenue grew by "just" 29% in 2024. Stock price, however, jumped 410% (as of writing) in the last 12 months. In terms of valuation metrics, Palantir trades at a staggering 112 times price-to-sales (P/S) ratio, which implies that investors already factored in massive future success into today's stock price.
It's not unusual for high-growth software companies to trade at lofty multiples early in their maturity curve. But in Palantir's case, the gap between valuation and current revenue scale raises questions. That could make the stock vulnerable if the AI opportunity comes out short, or if enterprise AI adoption is slower than expected.
The silver lining is that there is a timing difference between deals signed and revenue inflow, so investors can expect a massive ramp-up of revenue in the coming quarters. Still, execution needs to be nearly flawless to support the current valuation level, let alone increase it further.
Is Palantir a buy?
There's a lot to like about Palantir. It's building real solutions, working with mission-critical customers, and creating a foothold in enterprise AI.
But long-term investing requires more than just buying into a great story. It's about assessing whether the fundamentals can support the valuation being paid today.
Right now, Palantir still has work to do. Revenue remains concentrated, and commercial traction -- while improving -- hasn't yet reached escape velocity. Combine that with a valuation that assumes breakout success, and Palantir's stock remains a high-risk bet.
