Bull vs. Bear: Is Palantir a Buy or Sell?

In an ongoing series of articles looking at both the bullish and bearish cases for some popular stocks, I wanted to take a look at Palantir Technologies (NASDAQ: PLTR).

While the stock has been one of the market's best performers over the past three years, it has also been a lightning rod of controversy, with famed investor Michael Burry publicly announcing he has bought put options on the stock and placing a $46 fair value on the stock.

Let's dig into what all the excitement and controversy is about.

Image source: Getty Images.

The bull case

Palantir has grown to become one of the most important players in artificial intelligence (AI). The company has been able to leverage its data gathering and analytics technology that it created to help the U.S. government fight terrorism into a must-have AI operating system.

Palantir remains one of the most important vendors for the U.S. government, as its data analytics and artificial intelligence technology are used by both the U.S. military and intelligence agencies. The government uses its technology for a wide range of things, from AI-driven battlefield intelligence to illegal immigration identification and tracking. The U.S. government remains Palantir's biggest customer, and Palantir has been seeing robust growth despite overall defense budget cuts.

The company's biggest growth driver, however, has been its move into the commercial sector. Its secret sauce in this area is its Foundry Artificial Intelligence Platform (AIP), which can gather data from a wide array of sources and then organize it into an ontology that maps the data to objects and actions. This helps create a single source of truth linked to the real world in which third-party large language models (LLMs) can draw to provide actionable insights. It basically adds contextual awareness and makes AI much more reliable and useful in real-world settings, and has, as such, become an integral AI layer.

Palantir's edge also extends beyond its technology and into its go-to-market strategy. With its AI boot camps, the company can use AIP to help solve a potential customer's actual problem within five days based on their actual data. That's a huge selling point, which dramatically reduces friction and shrinks sales cycles.

Given the wide breadth of use cases for AIP and with basically no competition, Palantir has a huge and growing runway.

The bear case

The bear case for Palantir starts with the company's valuation. The stock has been on a remarkable run the past few years, as its revenue growth has accelerated for 10 straight quarters. However, that run has bumped its valuation up to a forward price-to-earnings (P/E) ratio surpassing 111 times and a forward price-to-sales (P/S) multiple of nearly 49 times based on current-year analyst estimates. While its valuation has actually come down a lot this year, that's still a very hefty multiple, which could cap the stock's upside.

However, valuation is not the only bearish argument against the stock. The company's government business is booming, but government spending is notoriously lumpy. Meanwhile, the company has close ties to the Trump administration, and a political shift in the White House could stall growth with its largest customer. At the same time, the company has benefited from commercial customers playing catch-up in AI. If this proves to be a pull-forward in demand, growth could slow.

And while Palantir faces little competition today, it could face a lot more in the future as the market shifts toward agentic AI. Companies like ServiceNow and Salesforce are working to become the master records of organizations' data, while, in the longer term, cloud providers could build a layer that challenges the value proposition of Palantir's ontology. Palantir essentially acts as a bridge between data and workflow, and there is no guarantee that this layer won't become more commoditized over time.

The verdict

I think Palantir has the opportunity to become one of the largest companies in the world, as platforms that sit at the center of how systems operate have historically created immense value for the companies that own them; just look at Microsoft, Apple, and Alphabet. Meanwhile, building a competing ontology layer is easier said than done -- that's why Palantir currently doesn't have any real competition in the space. That said, the stock is expensive and not without its risks. As such, I prefer it on a pullback.

Geoffrey Seiler has positions in Salesforce and ServiceNow. The Motley Fool has positions in and recommends Palantir Technologies, Salesforce, and ServiceNow. The Motley Fool has a disclosure policy.