Palantir Technologies Stock Has 1 Problem. Here's Why I'm Buying Anyway.

I make no attempt to hide my appreciation for Palantir Technologies (NASDAQ: PLTR) stock. The data analytics company has been one of the best stocks in the market since it unveiled its Artificial Intelligence Platform (AIP), which incorporates large language models enabling users to interact with the company's powerful software and gain real-time insights across everything from supply chain to military intelligence.

The results have been incredible. Look at Palantir's growth story since AIP came online in April 2023.

Data source: YCharts.

Even though Palantir (and many other tech stocks) are taking a bit of a breather so far this year, I'm convinced that the company's growth story is still in full swing. In fact, I'm such a Palantir stock bull that I'm able to overlook its one major flaw -- the valuation.

Image source: Getty Images.

The numbers aren't pretty

Palantir currently trades at a price-to-earnings ratio of 243 -- a mind-numbing figure. Consider that Nvidia, which is perhaps the most successful company on Wall Street, has a P/E of just 37. That means that investors are paying a lot more for Palantir's earnings than they are for Nvidia's, even though Nvidia's graphics processing units helped it become the most valuable publicly traded company in the world. So, while investors are betting that Palantir will continue to increase its earnings in the future, they're running a risk that the company is already badly overvalued.

Even Palantir's forward P/E ratio of 116 is eye-watering compared to Nvidia, which has a forward P/E of just 22.

But notably, Palantir's extreme valuation is beginning to moderate. Just a year ago, the P/E was north of 600.

Data by YCharts.

Here's why I'm not worried about Palantir's valuation

What's happening with Palantir isn't unprecedented. Remember that Amazon had a P/E of more than 1,000 for a short period in 2013. Things like that happen when the greater market is slow to appreciate the transformative nature of a company that's truly doing revolutionary things. Amazon was like that when it was "just" an e-commerce company, but has since grown into a global juggernaut that is also the world's largest cloud computing company.

Palantir is the same type of transformative company. Nobody else has platforms like Palantir. It taps into hundreds of data points, including satellite imagery from around the world, to provide military and intelligence agencies with battlefield analysis. Palantir is also being used by numerous other government agencies, such as Homeland Security, Health and Human Services, and the Department of the Treasury for data integration projects.

And commercial clients are flocking to Palantir to help manage their inventories and gain competitive advantages in their industries. Palantir's U.S. commercial revenue jumped 137% in the fourth quarter to $507 million, and its U.S. government revenue increased 66% to $570 million.

Palantir closed $4.26 billion in total contract value in the quarter, an astonishing amount for a company that had $4.47 billion in revenue for the entire year. And it closed 180 deals in the quarter valued at more than $1 million (each) -- or about two deals per day.

So, I'm not losing sleep over my Palantir investment. This company and the stock still have significant growth ahead.

Patrick Sanders has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.