Palantir's Momentum Is Undeniable, But Is the Stock a Buy at These Levels?

Key Points

• Palantir has a long and storied history of developing cutting-edge AI software.

• The stock has been wildly volatile, but also extremely profitable for investors with the fortitude to stay the course.

• Despite its egregious valuation, there are compelling reasons to own the stock -- but it isn't for everyone.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) has been on fire over the past few years, driven higher by the accelerating adoption of artificial intelligence (AI) and its legacy government contracts business. Shares of the data mining and AI specialist recently hit a new all-time high and are up 475% over the past year, more than 28 times the 17% gains of the S&P 500. Furthermore, since the dawn of AI in early 2023, the stock has rallied more than 2,330%, with no signs of slowing.

There's no denying the accelerating financial growth behind those gains, but investors have become increasingly wary about the staying power of the AI revolution and the stock's lofty valuation. Yet many experts feel it's still early days for the widespread adoption of AI, with a long runway for growth ahead. This leaves investors with a conundrum. Should they buy Palantir now in anticipation of additional gains or avoid the stock because its pricey valuation could result in steep declines?

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Let's take a look to see what the evidence suggests.

Image source: Getty Images.

The bottom could drop out, at least temporarily...

While Palantir's blistering run has been impressive, the gains haven't all been in a straight line. The uncertainty born of a high valuation, the potential consequences of blanket tariffs, and the ongoing battle with inflation took a toll earlier this year. And the reaction by the stock was as swift as it was brutal and was a harbinger for fair-weather investors.

After hitting an all-time high following its bullish fourth-quarter financial report, Palantir's stock price plunged nearly 41% between mid-February and early April, illustrating just how volatile it can be.

To be clear, Palantir isn't for the faint of heart and will likely experience similar wild stock price swings (both up and down) in the future.

What's fueling Palantir's epic run?

The AI revolution aside, one of the most significant developments for Palantir has been the company's consistently improving financial picture.

In Q4 2022, Palantir achieved its first-ever quarter of profitability under Generally Accepted Accounting Principles (GAAP) and never looked back. The company has since generated quarter after quarter of robust growth. The most recent results paint a picture.

In the first quarter, Palantir delivered revenue of $884 million, up 39% year over year and 7% sequentially. The results were driven by the company's U.S. commercial segment, as revenue soared 71% to $255 million. U.S. government revenue did its part, growing 45% to $373 million.

That's not all: Palantir's so-called "Rule of 40" score, which measures the company's revenue growth in the context of its earnings, is 83%, which signifies a healthy balance between sales growth and profitability. The metric has increased from just 38% less than two years ago and highlights the quality of Palantir's profits.

To be clear, the biggest growth driver is Palantir's Artificial Intelligence Platform (AIP). The system is able to aggregate data from multiple siloed software systems -- for example, sales, shipping, and inventory -- and consolidate it to a single dashboard and apply AI-fueled algorithms. Having all the information in one place helps Palantir's customers make data-driven decisions, with an assist from AI, which saves time and money.

To help customers over the knowledge hurdle presented by AI, Palantir hosts boot camps. In these intensive sessions, developers are paired with Palantir engineers to address real-world business problems. Many customers have signed seven-figure deals within days or weeks after completing these workshops, which illustrates the value of this approach.

How to approach Palantir stock now

While there's clear and convincing evidence that Palantir is executing at the highest level, I'd be remiss if I didn't address the elephant in the room: The stock's lofty valuation simply can't be ignored.

The stock is currently selling for 679 times earnings and 156 times sales (no, really!) -- which is egregious to be sure. Those frothy multiples have fueled extreme volatility, so Palantir won't be a good fit for every investor.

Many of Wall Street's finest are coming down with a fear of heights. Of the 25 analysts that offered an opinion in July, only four rate Palantir a buy or strong buy, 16 rate it a hold, and the remaining five have assigned underperform or sell ratings. It's no surprise that almost all the bearish calls cite the stock's pricey valuation.

Some investors might balk at buying such an expensive stock, but the bullish arguments are compelling. Wedbush analyst Dan Ives is Palantir's biggest cheerleader, suggesting the stock could soar another 178% to a $1 trillion market cap by 2028. To that end, he believes the company could generate double-digit year-over-year growth for much of the next decade. Investors who focus solely on valuation have missed "every transformational tech stock over the past 20 years," Ives said.

So which is right? Will Palantir stock lose 40% of its value, or will the company reach a trillion-dollar market cap over the next few years? I would respectfully submit that both will likely come to pass. Palantir's stock can be extraordinarily volatile, and it can climb to new heights. Investors wary of its valuation might consider buying a small stake and adding opportunistically over time. Another time-honored strategy is dollar-cost averaging, which allows investors to build a position over time, buying fewer shares when the stock is expensive and more shares when the price is more reasonable.

I'm a dyed-in-the-wool Palantir bull, and I believe the stock will be much higher 10 years down the road, but I have no doubt it will be a bumpy ride.

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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.