This AI Stock Is Up 11% in Just 1 Week. Time to Buy?

Shares of Palantir Technologies (NASDAQ: PLTR) are up more than 11% over the last week, even as the S&P 500 is about flat for the same period. Investors seem upbeat about the stock, following an earnings report that showcased rapid enterprise adoption of the company's AI (artificial intelligence) tools.

It's also possible that investors simply think the stock is oversold. After all, despite its gains over the last week, shares are still down 18% year to date -- a dramatic underperformance compared with the S&P 500's 0.5% gain over the same period.

Whatever the exact reason for the stock's surge over the last week, it's an interesting time to evaluate whether it is a good time to buy.

Image source: Getty Images.

Soaring sales and profits

Palantir's revenue rose 70% year over year to $1.4 billion in its most recent quarter, accelerating from 63% growth in the prior quarter. This top-line surge was driven by the company's U.S. commercial segment, where revenue climbed 137% year over year to $507 million.

The software provider is aggressively expanding its footprint beyond its traditional intelligence agency customer base, closing 180 deals worth at least $1 million during the quarter.

Meanwhile, Palantir's legacy U.S. government business also showed impressive strength, growing 66% year over year to $570 million.

Further, the company is proving it can balance this rapid expansion with substantial profitability. Palantir's fourth-quarter adjusted free cash flow came in at $791 million, representing a 56% free cash flow margin (free cash flow as a percent of sales).

And a key forward-looking indicator looks good, too. Palantir's remaining deal value -- a metric tracking the total value of executed contracts less revenue recognized to date -- jumped 105% year over year to $11.2 billion.

Clearly, the business is executing.

Highlighting its overall efficiency, management pointed to the Rule of 40 -- a software industry benchmark adding a company's revenue growth rate and adjusted operating margin.

"Palantir's Rule of 40 score is now an incredible 127%," said Palantir CEO Alex Karp.

Palantir's valuation is concerning

But execution isn't the question at this point. The problem is valuation.

Trading at about 80 times sales at the time of this writing, the market is pricing in years of uninterrupted hyper-growth.

To put that multiple in perspective, many mature software peers trade at less than a quarter of that premium.

Palantir's nearly $350 billion market capitalization leaves very little room for a meaningful slowdown in its top and bottom-line growth rates.

With this said, management expects its growth to remain torrid. The company guided revenue to about $7.2 billion this year, representing a strong 61% growth. And given management's history of regularly beating its guidance, Palantir's actual full-year growth rate could potentially end up being in line with the growth it reported in Q4.

Longer-term, however, is growth like this sustainable?

Given the wild valuation Palantir's stock is starting at today, any slip-ups could likely cause the stock to tumble. If enterprise budgets tighten or if sales cycles lengthen, the stock could face severe downward pressure.

Additionally, a valuation like this presents significant valuation risk -- the possibility that the stock will be rerated lower even as the underlying business continues to execute flawlessly.

Overall, Palantir's business looks great -- and its prospects do, too. The company's recent results showcase an undeniable structural advantage in the data analytics sector. And its dual engines of government and commercial revenue are firing simultaneously, providing a rare combination of stability and exponential upside. However, I believe the market has already priced in these optimistic scenarios. For this reason, I think staying on the sidelines is the best move.

Daniel Sparks and his clients have 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.