The Bull and Bear Case for Palantir, According to Wall Street

Palantir Technologies (NASDAQ: PLTR) has been one of the most popular -- and most divisive -- stocks in the market during the past several years. Palantir's signature products are software that does everything from helping soldiers on the battlefield to providing operational intelligence and analytics to commercial clients. Palantir's software stands out for its ability to collect data from thousands of sources and provide real-time insights.

However, the stock really took off in April 2023 when Palantir introduced its Artificial Intelligence Platform (AIP), which integrates seamlessly with its Gotham and Foundry platforms. By utilizing large language models and generative AI, AIP lets users submit queries in natural language, automate tasks, or have AI propose and complete them.

Since the launch of AIP, Palantir stock is up 1,380% -- a $10,000 investment made then would be worth more than $147,000 today. Palantir has slipped this year and is now about 40% off its all-time highs, but the company is still reporting phenomenal revenue and earnings growth.

Should you invest in Palantir today? Let's look at the bull and bear cases for Palantir stock.

The bull case for Palantir

When you're considering Palantir, the biggest thing that stands out is the company's incredible growth. Even though AIP is three years old now, the company's revenue and earnings growth are accelerating at an impressive rate.

Source: Palantir.

Palantir recorded revenue of $1.63 billion in the first quarter, with U.S. commercial revenue up 133% to $595 million and U.S. government revenue jumping 84% to $687 million. The company closed 206 deals in the quarter, each valued at more than $1 million, with 72 more than $5 million and 47 more than $10 million.

Palantir closed with a total contract value of $2.41 billion in the quarter, indicating that revenue growth will remain strong. Net income of $870.5 million was up 53% from a year ago.

Chief Executive Officer Alex Karp called it "staggering growth" and noted that Palantir achieved its strong results with a smaller headcount than two years ago.

While some within the industry are spending their way to a version or likeness of growth, we have built the platforms that are delivering record and accelerating levels of profit. We generated a total of $871 million in profit in the first quarter of the year, more than four times greater than the same period the year before. It is worth reiterating. Our quarterly profit -- the largest in our company's 23-year history -- has more than quadrupled in only 12 months. These are not incremental or marginal advances.

Palantir issued a forecast for second-quarter revenue of between $1.797 billion and $1.801 billion and full-year revenue between $7.65 billion and $7.662 billion. Oppenheimer's Param Singh expects a "solid beat and raise" when the company reports Q2 earnings on Aug. 3, with a price target of $200, representing potential upside of about 60% for Palantir stock.

Image source: The Motley Fool.

The bear case for Palantir

To be clear, I've invested in Palantir for several years, but I've done it with my eyes wide open. And I'm well aware that Palantir is not a perfect stock, with two major issues that could give investors pause.

First is the company's valuation. Palantir has long been richly valued, and its current forward price-to-earnings (P/E) ratio of 90 is frothy, particularly when you compare it to a stock like Nvidia, which has been an outstanding performer and has a P/E of only 22.

A high forward P/E means that investors are already pricing future profit growth into the stock. And while Palantir's revenue and profit have increased dramatically, investors have been extremely bullish, giving Palantir a forward P/E of more than 240 as recently as December. A high valuation like Palantir's is a definite risk because investors taking a position today are paying a premium for expected future growth. And if Palantir's growth slows, the stock's valuation could compress.

Michael Burry, the famed former hedge fund manager at Scion Capital who rose to fame for his "Big Short" bet against the housing market, calls Palantir a "sand castle" supported by AI applications. He maintains that Palantir's valuation is too high, and a small slowdown in AI growth could hurt the stock price.

Then there's the nature of Palantir's business. Palantir has been aggressively expanding its U.S. government business, including work for the Department of Homeland Security, the Pentagon, the Internal Revenue Service, and the Social Security Administration. Palantir's platforms were used by the now-defunct Department of Government Efficiency (DOGE), and even some Palantir employees have publicly objected to the company's government work.

Some investors take a company's mission and client base into account -- that's an individual decision for anyone looking to build a portfolio. And if you're not comfortable with Palantir's work, then that's something to consider.

The bottom line on Palantir

Palantir has executed flawlessly in recent years, and its earnings and revenue growth are impressive. But much of that optimism is already reflected in the stock price. Investors looking to take a position today should take a measured approach to the company, its work, and its ability to continue expanding its margins.

I think Palantir is a quality long-term investment. But, as with all investments, there are risks and rewards to consider, and even Wall Street has a variety of opinions.

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