Think Palantir Is Overhyped? This Metric Says It Still Has Room to Run

Palantir Technologies (NASDAQ: PLTR) has soared more than 2,000% over the past three years, driving its valuation to unbelievable levels, and this is thanks to the company's ability to do something very important: Palantir is helping customers immediately put artificial intelligence (AI) to work for them.

This tech company makes software platforms that aggregate and analyze a customer's data, and its AI-driven system, simply called Artificial Intelligence Platform (AIP) has been winning over government and commercial customers. All of this has helped revenue climb in the double digits, and customer count and contract value surge. So, it's no surprise that Palantir stock has roared higher too.

But trading for about 250x forward earnings estimates right now, and even more a few weeks ago, it's clear some investors think this tech stock is too expensive and overhyped. Still, the following metric says Palantir has room to run. Let's check it out.

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The Palantir story so far

Before we consider this metric, though, here's a quick summary of the Palantir story so far. This tech player isn't a new kid on the block. It's actually been around for more than 20 years, with government contracts accounting for most of its revenue. But its initial public offering in 2020 brought it to the forefront, and then the launch of AIP two years ago offered the company an extra boost.

Now, government customers continue to deliver double-digit revenue gains; but commercial customers have joined them as a major revenue driver. In recent quarters, these customers have increased in number -- from about 14 just five years ago to hundreds today -- and in the latest quarter, Palantir closed a record of $1.3 billion in U.S. commercial contract value.

Considering that we're still in the early days of companies applying AI to their businesses, Palantir could see more growth in the quarters to come. Analysts forecast that the AI market may reach into the trillions of dollars by the end of the decade -- that's great news for Palantir.

Balancing revenue and profit

Now, let's consider the metric that suggests Palantir stock may have more room to run. Yes, Palantir's valuation looks high now, but it's important to remember that it considers earnings forecasts for the coming year -- not farther down the road. The number to look at is Palantir's Rule of 40 score, which has reached 114%. This rule says a score of 40% or higher shows a company is successfully balancing revenue growth with profitability.

A score of more than 100% clearly shows that Palantir is winning in this area -- and this bodes well for the company's ability to grow and maintain strong profitability moving forward. This, in turn, could lead to positive stock performance. So, Palantir might not be overhyped, and instead, may have room to run.

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.