Peter Thiel, Political Noise, and Palantir: Separating Governance Risk From a Long‑Term Investment Case

No company is more unapologetic about its controversial goals than Palantir Technologies (NASDAQ: PLTR). The software provider and artificial intelligence (AI) powerhouse has rocketed to become one of the largest companies in the world, by market capitalization, by selling its analytics software to the U.S. government and to big business.

Founder and CEO Alex Karp keeps pushing an aggressive narrative of U.S. AI superiority, while founder and major investor Peter Thiel keeps donating to political causes that anger many Americans. These actions have led to protests over Palantir's contracts, both at home and abroad.

Here's what investors need to know about Palantir's political noise, what really matters for the business, and whether the stock is a buy right now.

Governance and political fireworks

Karp, Thiel, and a more quiet founder, Stephen Cohen, control Palantir by owning supervoting shares of its stock. This means the direction of the business, and its competitive and political strategies, will ultimately be decided by these three.

As the company has signed deals for tracking software with government agencies like the Department of Homeland Security, and use of its software in the Iran conflict has been rumored, Palantir has been unafraid to promote its views as an organization and to grow its revenue and profits. It even posted a 22-point manifesto outlining its beliefs about the future of the United States as a technological powerhouse, based on a recent book coauthored by Karp.

Usually, any political backlash against controversial government contracts is overblown, because it has little impact on the contractors. However, given Palantir's notoriety and its poor reputation among Democrats in the U.S., the company may face contract headwinds if the upcoming midterm elections are won by the current minority party.

Image source: Palantir Technologies.

Focusing on the business

Despite Palantir turning into a political football, I believe the business will be just fine even if midterm headwinds materialize. Its software is sold under long-term contracts to a variety of federal agencies and the U.S. military, and Congress cannot cancel these deals with a simple vote. Doing so would also risk collapsing the digital operating systems of many government agencies while software companies like Palantir seek to modernize the government.

In addition, Palantir's fastest-growing segment is commercial enterprises, which now accounts for around half of revenue; in the U.S. it grew 137% year over year last quarter to $507 million. U.S. government revenue is no slouch, posting 66% growth last quarter, but the bulk of contract momentum is coming from private businesses these days. Remaining deal value on U.S. commercial contracts last quarter grew 145% year over year to hit $4.38 billion.

PLTR PS Ratio data by YCharts.

Is Palantir stock a buy?

There is a lot to like about Palantir's growth today. However, if you look at the stock, it seems to have drifted away from fundamental reality.

Right now, Palantir has a market cap of $342 billion. Its stock price is up over 1,000% in the last three years alone. Even though revenue is growing quickly, it's not growing that quickly; Palantir's price-to-sales ratio (P/S) has ballooned to 82 as of this writing. This is significantly higher than the market average, and the P/S of any of its software peers.

Let me illustrate what this means for growth expectations. If you assume Palantir's revenue grows to $20 billion within the next decade, and its profitability rises to $10 billion annually, the stock would still trade at a price-to-earnings ratio (P/E) of 34 based on its current market cap.

So even if you're extremely bullish on Palantir's growth prospects, this optimism is already priced into the stock. Regardless of your agreement with Alex Karp's and Peter Thiel's political beliefs, everyone should be able to agree that Palantir stock looks overvalued today.

Brett Schafer 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.