Is Palantir a Buy?

Palantir Technologies (NASDAQ: PLTR) has been one of the biggest success stories of the artificial intelligence (AI) boom so far. The software company has seen revenue and profit climb, and this as well as demand for its platforms has resulted in explosive stock performance. The shares have surged more than 2,000% over the past three years.

That's fantastic, but the result of such a run-up in the stock price is that its valuation also has climbed -- leaving the stock at levels some say is exorbitant. In fact, Wall Street's average estimate calls for the shares to fall 15% over the coming 12 months. Meanwhile, though, Palantir's business doesn't show signs of weakening, so the stock could continue to grow for quite some time.

Considering the full picture, the positive and negative points, is Palantir a buy?

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Palantir's 20-year history

First, let's back up a bit and consider how Palantir has gotten to where it is today. The company, after all, has a long history as it's more than 20 years old. Back in the early days, this tech player mainly generated revenue through government contracts -- and it wasn't yet publicly traded. In fact, Palantir only launched its initial public offering five years ago, but since that time, its story has greatly accelerated.

The company has reached profitability and gone on to grow that profit, and revenue, too, has taken off, with its government and commercial businesses posting double-digit gains quarter after quarter. Palantir has gathered momentum in recent years amid interest from both of these customers in adding AI to their operations and processes.

Palantir, known for software that helps customers optimize the use of their data, launched its Artificial Intelligence Platform (AIP) in 2023, and this has supercharged its growth. AIP allows customers to harness the power of AI in the aggregation and analysis of their data -- and using this, develop new ways of handling challenges on a battlefield, for the military client for example, or increasing efficiency at a company or organization.

Palantir has quickly won customers thanks to its method of introducing them to AIP -- through bootcamps that help them see how the platform could be applied to their specific problems. In the latest quarter, Palantir said a healthcare company signed an $88 million deal to streamline patient care just a month after its bootcamp.

Applying AI to make game-changing decisions

The company offers customers a way to immediately apply AI to their operations to gain in efficiency, make game-changing decisions, and boost growth. So, it's not too surprising that earnings have taken off in recent times, and with interest in the AI market growing, this momentum may continue. Even though Palantir may seem like an overnight success, it's important to note that its decades of software development have a lot to do with the company's strength today.

A particularly positive point right now is that Palantir, which originally depended on growth from government revenue, now continues to see growth there as well as from the commercial customer. U.S commercial customer numbers and deal values have soared -- customers have climbed from a handful to hundreds in about four years and in the recent quarter contract value reached a record $843 million.

The valuation concern

All of this supports the idea of more growth ahead, but valuation has prompted some investors to avoid the shares. And it's true that, trading at 279 times forward earnings estimates, they're not cheap.

But it's important to note that this valuation -- using earnings estimates for the coming year -- doesn't take into account Palantir's potential over the years to come. Many tech stocks go through periods of high valuations, only to see these numbers even out over time.

So, should you buy Palantir? The answer depends on your profile as an investor. If you're looking for value stocks or you have a cautious investment style, Palantir isn't the best choice for you right now. But, if you're a growth investor who doesn't mind a pullback in price here and there and are ready to hold on for the long term, your patience may be greatly rewarded.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.