Here's What I Think Is Going on With Palantir Stock

Palantir Technologies (NASDAQ: PLTR) represented a surefire path to stock market gains a couple of years ago. Investors rushed to get in on this software player, and the shares soared 1,700% in just three years. The reason for all of the excitement about Palantir? The company was one of the first to benefit from the artificial intelligence (AI) revolution.

But, over the past six months, Palantir has offered shareholders a bumpy ride. This isn't in terms of earnings -- revenue, profit, and demand for Palantir's software continue to roar higher. Yet the stock price hasn't followed. Over this time period, it's dropped about 27%. And the stellar earnings reports haven't even offered a temporary boost. For example, after Palantir's latest blowout report, the shares fell almost 7% in the next trading session.

So, why are shares of this tech player falling even when business is going strong? Here's what I think is going on with Palantir stock.

Image source: Getty Images.

Palantir's 20-year history

Before diving in, let's take a look at the Palantir story so far. This company may have just taken center stage in recent years, but it isn't a young start up. Palantir actually has been around for more than two decades, and over that time, has built up a solid business -- in the early days, it primarily served government clients.

Palantir's software helps customers gather, analyze, and make better use of their data -- and a few years ago, the company added a new offering to its portfolio, one that's driving growth today. This is Palantir's Artificial Intelligence Platform (AIP), which brings the power of large language models to the data analysis process. And the results often are game-changing, helping customers make crucial decisions, develop new ways to organize workflow, and much more.

And after the AIP launch, one particular trend accelerated: growth of the commercial customer. Palantir designed bootcamps to introduce the product to companies and organizations, and these saw great demand and quickly brought in customers.

All of this has helped Palantir's earnings to soar, and importantly, the number of customers and the value of contracts are also climbing. In the recent quarter, for example, U.S. commercial customer count rose 42% to 615, while total contract value rose 61% to $2.4 billion.

Dan Ives' thoughts on Palantir

Though some investors spoke of a slight disappointment in U.S. commercial sales in the recent quarter, well-known tech analyst Dan Ives of Wedbush cast aside that concern during a CNBC interview: He said that $20 million from one deal that should have been commercial actually was shifted to the government business.

"When you put it all together, they crushed numbers," Ives said.

So now is the perfect moment to ask our question: Why is the stock falling when business is doing so well?

In recent times, investors have worried about two things in particular: Palantir's valuation and the idea that AI may replace software. The stock trades at 94x forward earnings estimates, and though that's down from a peak of more than 240x, it's still high. And advances in AI have prompted investors to wonder if AI tools will actually do the job of today's software down the road.

Why Palantir stock is falling

I don't think AI will replace deeply integrated and secure platforms such as those of Palantir, and as for valuation, it may look high today, but this metric doesn't include growth potential a few years from now. So I wouldn't avoid the stock for these reasons -- but I do think that some investors may be leaning on these reasons and either selling Palantir or hesitating to get in on the stock.

On top of this, considering Palantir's significant increase in recent years, some early investors may be locking in gains and rotating into up-and-coming AI companies or even very established players that haven't yet delivered major returns. They might see more opportunity for gains from a new batch of companies than from a player that's already soared more than 1,000%.

The result? Even though Palantir's earnings are soaring, investors are favoring other stocks right now. But here's the good news for Palantir shareholders and even potential shareholders: The company has the products, demand, and earnings performance to succeed over the long run, and that could eventually push the stock much higher.

So what should investors do now? If you're a growth investor, you might take advantage of the dip to add some Palantir shares to your portfolio. And if you're a current shareholder, focus on the company's earnings picture and long-term prospects: Today, they're suggesting that Palantir is a stock to hold onto as this AI story continues.

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.