The Palantir Technologies(PLTR +1.25%) bubble is finally beginning to deflate: Shares in the artificial intelligence (AI)-driven data analytics company are now down 24% from the all-time high of $207 it reached in November.
While the company's revenue and earnings continue to grow at an impressive clip, the stock has become so expensive that it is detached from fundamentals. Let's dig deeper into how much further Palantir could fall and decide when it might become an attractive long-term buy.
NASDAQ: PLTR
Key Data Points
Why did Palantir boom?
Palantir has been one of the top-performing AI companies over the last three years, with share price appreciation that topped even the industry leader, Nvidia, and absolutely trounced the S&P 500. That said, Palantir arguably isn't a "true" AI company in the same vein as OpenAI or Anthropic, which develop and run large language models (LLMs).
Palantir focuses on big data analytics, helping its clients sift through vast volumes of data to uncover actionable insights. Among the uses for its technology are detecting fraud and finding ways to increase operational efficiency.
Palantir also offers its software solutions to government customers such as military branches and intelligence agencies, helping them develop systems for target selection and battlefield awareness. It has high-profile contracts with the U.S. Army and the North Atlantic Treaty Organization (NATO).
That said, while Palantir isn't a pure-play AI company, its data analytics business synergizes extremely well with the new technology by allowing operators to pose queries using natural language in real time. And since the launch of the company's Artificial Intelligence Platform (AIP) in 2023, it has experienced a notable surge in revenue growth.
Business is still booming
Palantir's fourth-quarter earnings reflect outstanding demand for its software services. Revenue soared 70% year over year to $1.41 billion, driven by strength in its U.S. commercial segment, which increased by an eye-popping 137% in the period as enterprise clients rushed to incorporate its new AI-driven data analytics tools into their organizations.
The strength in Palantir's enterprise software business is surprising. On the surface, the company would seem to have a much bigger competitive advantage in the public sector because of its long-established relationship with the U.S. government, widespread security clearances, and resistance to public and internal pressure. In contrast, in the private sector, it faces more intense competition from rivals such as Microsoft Fabric and Snowflake, which have also incorporated generative AI into their software offerings.
Nevertheless, Palantir is maintaining a high growth rate despite the challenges, suggesting it has established an economic moat that helps it stand out despite the stiff competition.
Some of this strength may be due to branding. Company executives might figure that if Palantir's software is good (and secure) enough for the U.S. government to use, it must also be good enough for their organizations. And over time, Palantir's economic moat could widen thanks to economies of scale advantages and high switching costs.
There's only one problem with Palantir
Image source: Getty Images.
On the surface, Palantir looks like an ideal technology investment. It has found a way to monetize AI technology, but lacks the cash burn and huge data center spending of many other players in the industry. Furthermore, its business is growing at a massive clip and is diversified into many different parts of the public and private sectors.
That said, the stock has one glaring weakness: its lofty valuation. Its price-to-earnings (P/E) ratio of 230 is an order of magnitude higher than the S&P 500's average of 24. This is far too much of a premium to pay, even for an excellent company.
Even after its recent declines, there is room for the stock to fall by an additional 25% to 50%. So investors should be patient for now.
