Palantir's AI-Driven Stock Surge: Analyzing the Bubble Concerns

Up 288%, Is Palantir Stock a Buy? | The Motley Fool

With shares up 288% year to date, Palantir (PLTR 0.47%) is one of 2024's best-performing artificial intelligence (AI) stocks, easily beating out hardware giant Nvidia (up 188%). But do this data analytics company's fundamentals justify its $140 billion market cap? Let's dig deeper into Palantir's situation to determine if the stock is still a good buy. Roughly two years since the launch of OpenAI's ChatGPT in late 2022, analysts remain optimistic about the AI industry. According to a report from Bain & Co. released in September, the AI revenue opportunity could grow by 40% to 55% annually from $185 billion last year to a range of $780 billion to $990 billion by 2027 as companies leave the experimental phase and begin to incorporate the technology into their actual operations. Palantir is positioned to monetize this trend better than most. As a big data analytics company, its business involves synthesizing large volumes of information to help clients discover trends and detect problems like fraud. AI large language models (LLMs) can make this process work in real-time scenarios like combat or law enforcement missions. In 2023, Palantir generated sales of $2.23 billion. And in a best-case scenario where it matches Bain's highest projected AI revenue growth rate of 55%, the company's top line could jump to $12.87 billion by 2027. In reality, management expects to generate $2.8 billion to $2.9 billion in 2024 revenue, implying a 26% growth rate. That said, the generative-AI-specific parts of Palantir's business are likely growing faster than the total. And this could eventually cause Palantir's overall growth rate to accelerate over the coming years. According to the Financial Times, Palantir has added a whopping $23 billion to its market cap since Donald Trump won the presidential election on Nov. 5. Investors seem to believe the company will benefit from increased defense and law enforcement spending under the new administration. However, this narrative looks overblown. Palantir is already involved in major global conflict zones like Eastern Europe, where it helps the armed forces of Ukraine with military targeting, and the Middle East, where it provides Israel with "battle tech." However, it is important to note that Trump has pledged to wind down both of these conflicts, claiming that he would end the Ukraine war in one day, and reportedly telling Israeli Prime Minister Benjamin Netanyahu to wrap up the war in Gaza before he enters office. It doesn't make much sense for investors to bid up Palantir stock in anticipation of military-related spending that probably won't materialize. Palantir could play a role in Trump's deportation efforts through Falcon, a contract that provides data analytics to assist Immigration and Customs Enforcement (ICE) with deportations. But this deal only generated $127 million between 2013 and 2022, which isn't a game changer. Business Insider also reports that ICE may be working on switching to a custom-built replacement tool called Raven.

Is Palantir a Buy? | The Motley Fool

One of the hottest stocks this year has been Palantir (PLTR 4.87%). The company's strong results and inclusion into the S&P 500 have helped its stock soar more than 250% this year, as of this writing. While the stock has been a great performer this year, the question on many investors' minds is whether the stock is still a buy after its big gains this year. Let's take a closer look at both the buy and sell cases regarding Palantir stock to help you decide. Palantir has established itself as one of the leading data gathering and analytics companies in the world through its work with the U.S. government, with such mission-critical tasks as fighting terrorism and tracking COVID-19 cases. However, the company's Artificial Intelligence Platform (AIP) and its move into the commercial sector are the biggest reasons to be bullish on the stock. The company has seen its growth in the U.S. commercial sector explode in recent quarters, as it continues to add more and more commercial customers who are attracted to its AI platform and the various use cases it can be used for across industries. Last quarter, Palantir's U.S. commercial revenue surged 54% to $179 million, with it saying that AIP was seeing "unrelenting AI demand" among these customers. Its U.S. commercial customer count, meanwhile, grew 77% year over year, while its total contract value (TCV) jumped 37% to nearly $300 million. The company has also been seeing accelerating growth with its largest customer, the U.S. government, which has begun embracing its AI offerings. U.S. government revenue climbed 40% last quarter to $320 million. The company said it is starting to see every aspect of government, including the White House, Congress, Defense, and Intel agencies, begin to embrace the application of large language models (LLMs). The biggest opportunity for Palantir going forward, however, is moving customers from AI prototype work into production. Right now, the company is landing a lot of new customers, but the bigger opportunity will come when it starts expanding within these customers. The company already has a strong net dollar retention rate, which came in a 118% last quarter. This measures how much revenue came from existing customers that have been with the company for more than a year, minus any customer churn. However, Palantir's net dollar retention does not include growth from customers added within the past 12 months, and this is where the big growth opportunity lies. Palantir has added a lot of new AIP customers over the past year for early AI prototype work, and expanding within these newer customers will really give it an opportunity to continue to accelerate its revenue growth moving forward. And accelerating revenue growth can lead to a higher stock price. While Palantir has proven itself to be a great company, whether its stock is a buy is a totally different question. While great companies typically don't trade at bargain-basement prices, valuation does still matter. And valuation is the biggest knock on Palantir's stock. The stock now trades at a forward price-to-sales (P/S) ratio of about 40 times next year's analyst estimates. Taking out its net cash and using an enterprise value to sales multiple (EV/S), it still trades at 39 times. At the peak of software-as-a-service (SaaS) valuations, SaaS stocks traded at a 19.4 EV/S multiple while growing revenue in the low 30% range, which is just below the 30% growth that Palantir recorded last quarter. Meanwhile, Palantir executives and other insiders also appear to recognize the valuation heights to which the stock has climbed, with a number of them unloading shares in recent months, including CEO Alex Karp. Karp has been a regular seller of Palantir stock in recent years, but he has greatly picked up his selling since September. Over the past few months, he's exercised options and sold stock on four separate occasions, selling more than 33 million shares for gross proceeds of more than $1.6 billion. Meanwhile, chairman Peter Thiel sold over $1 billion in stock in September and early October, while numerous other insiders have been selling shares as well. In the case of Palantir, I'd follow what the company executives are doing. It's a great company, but its valuation is now twice what peak SaaS valuations were just a few years ago, with a similar growth rate. As such, I would not be a new buyer of the stock, and I think investors should at the very least consider taking some profits in the stock after a very strong run.

Palantir's Stock Just Did Something It Hasn't Done Since 2021

Palantir (PLTR 2.81%) has been one of the hottest artificial intelligence (AI) stocks to own this year. It's up around 280% as of the time of this writing and has far exceeded many investors' expectations. However, this run-up hasn't entirely come from its business booming, as the price investors are willing to pay for its performance has surged alongside its stock price. This has caused the stock to do something it hasn't done since 2021, and investors need to pay attention to it. Palantir's product is seeing huge demand Palantir's AI software has become a massive hit, as the company has years of expertise in this space that its competition doesn't have. Palantir's platform started off tailored for government use, allowing the software to take in massive amounts of information, process it quickly, and then give insights as to which actions to take next. This general concept is also useful for commercial businesses, so Palantir eventually expanded to this side. As of the third quarter, the government business is still larger than the commercial side, but it's starting to become a fairly even split, with government revenue making up 56% of the total. The latest surge in AI demand has massively benefited Palantir, as more clients are looking for ways to integrate AI into their daily operations. This has a twofold effect for its customers. First, Palantir can automate some of the repetitive tasks that an employee may manually do. Second, the employees making decisions based on this information can be better informed because it gets to them in real-time. All of this has caused Palantir's product revenue to soar, rising 30% year over year to $726 million. The U.S., in particular, is seeing more demand than the international side. U.S. commercial revenue rose 54% year over year to $179 million, and U.S. government revenue rose 40% year over year to $320 million. International sales are a big deal for Palantir, as they make up about a third of sales. While this part of the business isn't necessarily "weak," it just hasn't seen the AI race that the U.S. has. Once the international client base starts to get the same AI fever as the U.S., Palantir's growth could accelerate even more. You may be tempted to place a significant bet on Palantir's stock with just that information. However, what Palantir has recently done for the first time since 2021 isn't good, and it could end in disaster for Palantir investors. The stock has gotten incredibly expensive With Palantir's stock price rising 280% this year, yet revenue only rising around 30%, there's a clear disconnect between business growth and stock growth. Investors are now willing to pay more for Palantir's business, which has caused its valuation to surge. From a price-to-sales (P/S) standpoint, Palantir now trades for nearly 60 times sales. PLTR PS Ratio data by YCharts The last time Palantir traded that high was in 2021, and the stock didn't do well until over two years later. When Palantir reached its peak valuation in February 2021, the stock tumbled around 80% from its all-time highs. It had nothing to do with the business, as revenue kept growing during that time frame. PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts This brings up an important reality for investors: Even though Palantir's business is growing, the stock price can still drop. Few companies have ever traded for 50 times sales and been a winning investment. That level of expectation is so high that only companies doubling or tripling their revenue year over year can justify it. Palantir's revenue growth is only in the 30% range. While that's not slow growth by any means, it's far less than Nvidia saw during its major run. Even though Nvidia has been tripling its revenue year over year for multiple quarters in a row, it has never traded for more than 45 times sales. This doesn't add up, and investors who own Palantir stock need to be careful. History may not repeat itself, but it does often rhyme. Palantir is a very expensive stock that isn't putting up the results it needs to justify its valuation. Unless revenue starts doubling or tripling in the near future, it's possible the company's bubble could burst. It may be months from now or even a year from now, but if Palantir keeps up its standard growth rates at its current valuation, the results won't be pretty, and investors could be sitting on a loss like they were during 2021 and 2022. So, what should investors do? I don't think you need to sell every share of Palantir if you think it can go higher, but at least take some profits off the table. That way, you'll still have captured some gains from this latest run.

Will Palantir Technologies Be a Trillion-Dollar Stock by 2030? | The Motley Fool

Palantir has emerged as arguably the market's top AI stock, and investors expect big things in the future. Artificial intelligence (AI) has dominated Wall Street's attention since bursting onto the scene roughly two years ago. While Nvidia was arguably the hottest AI stock of 2023, Palantir Technologies (PLTR) seems to have taken the lead in this year's race. The stock price has exploded, appreciating over 235% over the past year and roughly 900% since January 2023. What sparked the price jump in 2024? It likely has to do with the company's Artificial Intelligence Platform (AIP), which is a smashing success and has helped ignite profitable and accelerating revenue growth. Now, with Palantir at a $147 billion market cap, is it time for investors to think bigger? Could Palantir become a trillion-dollar company by 2030? Here is what you need to know. It doesn't seem like a stretch to call AI one of the most significant advances in modern history. According to market research firm IDC, AI could create nearly $20 trillion in cumulative economic value by 2030. That's both directly and indirectly, meaning it's counting not just AI applications themselves but the value AI can create across other industries through increased productivity and efficiency. Why is this important? It shows how diverse AI's impact can be, and that plays directly into Palantir's hands. Palantir creates and deploys custom AI, machine learning, and data analytics software. This software can do a countless number of jobs. Palantir got its start in government work, aiding in classified missions within the military. It helped roll out the COVID-19 vaccine during the pandemic. Today, it's helping hospital systems run efficiently and detecting financial fraud, among dozens of other applications. Any organization large enough to have many moving parts (people, processes, and data) is a potential customer. Palantir's total revenue grew 30% year over year in the third quarter, but its U.S. revenue grew 44%, driven by 40% growth in government business and 54% commercial growth. As U.S. revenue grows and makes up a more significant part of the total pie, it's accelerating the company's total top-line growth: Palantir has grown its U.S. commercial client base fivefold over the past three years and still, remarkably, has just 321 U.S. commercial customers. There are approximately 20,000 large companies (at least 500 employees) in the United States. That's a wide-open opportunity, even if Palantir ultimately works with just a fraction of them. It's hard to predict how much more Palantir's growth will accelerate, but this growth story seems to be in its early chapters. To become a $1 trillion company, Palantir must grow roughly sevenfold from its current size. Revenue growth, valuation, or both can achieve that. First, let's project what Palantir's revenue might look like by 2030. Analysts estimate Palantir's 2024 revenue will come in at $2.8 billion. I'll extrapolate that out five years at hypothetical growth rates of 20%, 30%, and 40%. That would look like this: Table by author. Palantir's stock must trade at some pretty high valuations to achieve a $1 trillion market cap on $7 billion to $15 billion in revenue. The stock's price-to-sales (P/S) ratio would need to be between 67 and 143 depending on whether Palantir's revenue hits the high or low end of these projections. I'm not going to tell you it's impossible. Snowflake was one of the hottest stocks on Wall Street in late 2021 when the company's P/S ratio peaked at 183. However, that was during a stock market bubble. Snowflake is still down almost 60% from its former high, and its P/S ratio has collapsed by 90%. Such extreme valuations rarely end well. Today, Palantir trades at a P/S ratio of 58. That's not 2021 Snowflake high, but it's even higher than its peak during that same market bubble! Technically speaking, Palantir can defy the odds, but I'd say it's doubtful the stock will approach a $1 trillion market cap by 2030. Palantir's a mighty impressive company, but the problem is that the stock is already baking in at least a few years' worth of growth. The math could dramatically change if the stock crashes to a much lower valuation or Palantir grows well beyond the 40% rate I projected. But beyond those things, Palantir stock is arguably a bubble itself, which may eventually disappoint investors expecting more big things from the stock. Given all this, it's highly unlikely Palantir can hit a trillion-dollar valuation in just over five years. But the odds of it outpacing the market overall are still within reach and it's still worth a closer look.

Is Palantir's Stock in a Bubble? History Says Yes. | The Motley Fool

There's plenty of evidence that Palantir's (PLTR) stock is in a bubble. History is not on Palantir's side, and many companies have traded around the lofty expectation its stock currently trades at, and few (if any) have worked out well for investors. So, how can one of the most dominant AI software companies be in a bubble when business is booming? It's simple: Expectations outweigh reality. To be clear, Palantir's business is fantastic and will continue to grow. That part isn't up for debate. Palantir offers a top-notch AI software product that allows its users to make the most informed decisions possible. This benefits governments that deploy its software as well as commercial businesses. Its Artificial Intelligence Platform (AIP) product is also top-notch. It allows users to integrate generative AI models into a business's inner workings rather than using them as a tool on the side. But I draw the line at calling Palantir the Nvidia of the software world, as it's in a far too competitive market to have that title. Nvidia is in a world of its own in terms of performance compared to its peers, so it became the only choice. Palantir has competition from many directions. It's competing against other companies that have pre-built AI models, consulting firms that have the talent to build these models for their clients, and individual contributors that are building these AI models for their own companies. While Palantir has been successful so far, the number of clients it can sign is fairly limited. Palantir's software is incredibly expensive, mainly because it is purpose-built for each application. In the third quarter, Palantir had 321 U.S. commercial clients, generating $179 million in revenue. If you annualize that revenue figure, you get an average revenue per customer of $2.23 million. This leaves out a lot of potential small and mid-sized clients and caps the maximum customer base Palantir can reach. This isn't a knock on Palantir or its product; it's just the reality that not every business will use Palantir, whereas something like a Nvidia GPU might be deployed by a vast majority of businesses in one way or another. However, the stock is trading like Palantir's software will be used by everyone in every business worldwide. In the third quarter, Palantir's revenue grew 30% year over year. While that's strong growth, it's not nearly enough to justify the stock price. Let's take a look at another high-flier that everyone was going to use forever: Zoom Video. Back in the pandemic years, Zoom saw rapid adoption as everyone equipped themselves to work from home. There were predictions that nobody would return to the office, and Zoom would be the new way of doing business. Zoom's revenue rapidly expanded, and so did the stock valuation. Zoom's revenue quadrupled year over year for a few quarters, but even when revenue was doubling, the stock traded for around 40 to 60 times sales. Once the boom was over, Zoom's stock price collapsed, and it now sits only 15% above where it entered 2020. Palantir hasn't shown nearly that level of growth, yet its stock trades at a lofty 57 times sales. This isn't the first time Palantir has traded around this level, but the last time it did so, it was growing revenue much faster. As another comparison point, Nvidia never traded for more than 45 times sales, even when its revenue tripled year over year. Palantir's stock looks to be in a bubble, and investors need to be careful. The problem is that bubbles can go much higher before they burst, and Palantir's stock may continue to rise. However, unless Palantir starts doubling or tripling its revenue year over year and sustains that for a few years, this valuation doesn't make sense. The company will likely continue to grow and succeed, but over the long term, I doubt the stock will. There are far too many great companies at fair prices in the market that offer greater long-term return potential, and I'd look there (or move profits from Palantir to there) before investing in this stock that's due for a massive drop.

Palantir Stock: Buy, Sell, or Hold? | The Motley Fool

Palantir's (PLTR 2.81%) share price has spiked recently, rising more than 220% over the past 12 months. Investors are optimistic about the company's growth in the artificial intelligence (AI) market, as its analytics software helps companies and government agencies make sense of their vast quantities of data. But Palantir's soaring share price has no doubt left many investors wondering if they should sell the stock to lock in their gains, continue holding, or even buy shares. Here are a few suggestions. If you're considering selling your Palantir stock, you should ask yourself a few questions first. Consider these good reasons to sell a stock: Considering that nothing drastic has changed about Palantir's business and that the artificial intelligence market remains healthy, if you hold the stock, it's unlikely your initial reasons for buying it have ceased to apply. There's also no news suggesting that Palantir is the target of acquisition interest. Still, there's nothing wrong with taking your large Palantir gains right now if you need the money for something else, like buying a new house or another large expense. What's more, if Palantir now makes up too much of your overall portfolio's value, you may want to sell some shares to rebalance it. If you already own Palantir, you're likely trying to decide whether the stock has more room to run. While there's no way to know for sure, the company's impressive growth is an indicator that it's still on the right track. Palantir's revenue increased 30% in the third quarter to $726 million, comfortably ahead of Wall Street's consensus estimate of $701 million. And the company's adjusted earnings per share (EPS) grew 43% from the year-ago quarter to $0.10, beating analysts' consensus estimate of $0.09. The company also grew its customer count by an impressive 39% and closed 104 deals worth $1 million or more. In short, Palantir's business is doing well and nothing fundamentally changed with the company that should give investors pause. All of this means that holding onto your Palantir shares is probably a good strategy right now. I'll admit that I think the case for buying Palantir right now is pretty weak. Not because it isn't a good company but because its stock is so expensive. The shares have a price-to-earnings ratio of 328 as of this writing. That's a staggering P/E ratio, even for a growth stock in the technology sector. For comparison, the overall tech sector currently has a P/E ratio of about 33. If there's a pullback in the company's share price, that might create a buying opportunity for investors. But as it stands right now, Palantir's stock is too expensive to buy. I think if you own Palantir's stock, you should hold onto your shares unless you really need the money for something else or want to rebalance your portfolio. However, even if you want to buy Palantir's stock, it's probably best not to right now, considering its lofty valuation. The company offers an impressive opportunity in the AI space, but it's priced for perfection.