Palantir Technologies (NYSE:PLTR) has seen a significant increase in its stock price in 2024 driven by optimism around its potential in the artificial intelligence (AI) sector. The AI-powered data analytics company has captured investor attention with its innovative solutions and expanding client base.
Palantir helps businesses and governments worldwide to integrate and manage their data. The company’s new AI offerings have boosted revenue and profits, as it sees continued growth in both commercial and government markets.
However, the stock appears priced for perfection, suggesting caution for potential buyers in the near term. PLTR stock has surged 55% year-to-date, significantly outpacing the Nasdaq 100 index’s 13% gain. On July 18, it reached an all-time high, closing at $29.83. Currently, it is trading slightly below $27, representing a decline of approximately 11% since then.
In this article, we will discuss Palantir’s recent valuation metrics, financial performance and growth drivers. Investors can then decide if they also agree that although PLTR stock is a long-term buy, it’d be prudent to wait before pulling the trigger.
Valuation Concerns For Palantir Stock
A closer look at valuation metrics shows that Palantir’s forward price-to-earnings (P/E) and trailing price-to-sales (P/S) ratios are 87x and 25.4x, respectively. These numbers, as well as several other valuation metrics, are quite high compared to industry peers. In other words, PLTR stock is trading at a substantial premium.
In terms of Wall Street forecasts, Palantir has an overall “neutral” rating among 19 analysts. Furthermore, the 12-month median price target of $22.06 indicates a 17% potential downside from current levels. Thus, many analysts believe the stock may be overvalued at its current price.
The high valuation metrics and subdued analyst outlook warrant investor caution, as they highlight little room for error. Investors might want to hold off on purchasing PLTR stock and consider waiting for a more attractive entry point. A potential disappointment in growth or profitability could lead to significant downside risk.
Why PLTR Should Be on Your Watchlist
Despite the short-term risks to the PLTR stock price, Palantir has significant long-term potential. The company is well-positioned to benefit from the accelerating adoption of AI, given its increasing experience and innovative steps in the field. In April 2023, Palantir launched its Artificial Intelligence Platform (AIP), which helps customers detect patterns and gain valuable insights from unstructured data. Increased urgency of investing in AI solutions has created robust demand for Palantir’s AIP solution, boosting both revenue and bottom-line profits.
On May 5, Palantir released robust first quarter 2024 metrics. Revenue grew 21% year-over-year (YOY) to $634 million, driven by a 27% increase in commercial revenue. The acceleration in the U.S. government business also contributed to topline growth with a 16% YOY increase in government revenue. Palantir reported its sixth consecutive quarter of GAAP profitability. GAAP EPS increased to 4 cents from 1 cent in the prior-year quarter, while adjusted EPS rose to 8 cents from 5 cents a year ago.
As companies increasingly invest in AI capabilities, Palantir should continue to grow in both commercial and government markets. The company is making its AIP open-source, which could further pave the way for its mass adoption. Additionally, there are substantial switching costs for customers who employ Palantir’s products in critical functions, suggesting that recurring revenue is likely to remain high. Meanwhile, Palantir continues to roll out boot camp programs for prospective customers, which have helped compress sales cycles for its products and services.
While a reduction in AI spending could directly impact Palantir’s sales, this is not a likely scenario within the next year. Given booming AI spending across various industries, the company is likely to expand its customers base.
The Bottom Line: Adding Palantir Stock to Portfolios
In conclusion, Palantir’s long-term growth prospects remain promising thanks to strong demand for its AIP platform and robust commercial revenue growth. The company boasts plenty of catalysts to continue powering its rally. Therefore, PLTR stock could be a great investment for long-term investors, if they can handle short-term volatility.
However, despite the bullish AI narrative, we would choose not to get too carried away by PLTR stock at this juncture. It may be wise to wait for a more attractive entry point to initiate a long position in PLTR. For instance, a target buy price of around or even below $25 would offer a better risk/reward opportunity for long-term Palantir bulls.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.