Is Palantir Stock a Buy Now?

Key Points

• Palantir's revenue jumped 39% and earnings doubled in the first quarter.

• The company's stock is very expensive, and its share price can be volatile.

• Long-term investors considering buying now should start with a small position and know the risks.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) quickly became one of the most popular artificial intelligence stocks over the past few years, with its shares gaining 400% in the past year alone. Palantir's artificial intelligence software and services help the U.S. government and private companies make sense of complex data, giving them the ability to make more informed decisions.

While some AI tools are more sizzle than steak, Palantir's AI software continually attracts customers, and its contracts are expanding, proving its services add real value.

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With the company's share price on a tear and Palantir putting up impressive quarterly results, is now a good time to buy Palantir stock? Here's why investors are drawn to Palantir, and one word of caution if you're about to hit the buy button.

Image source: Getty Images.

What Palantir is doing right

You don't have to look hard to find what Palantir is doing well. In the first quarter, the company's sales spiked 39% to $884 million and its earnings per share doubled to $0.08. And the company's CEO, Alexander Karp, pointed out that Palantir is in the midst of a "tectonic shift in the adoption of our software," which is pretty much exactly what you want the CEO of any stock you own to say about how customers are responding to a product.

Following its strong quarter, Palantir's management raised the company's full-year guidance and now expects sales to be about $3.9 billion, more than double its sales from 2024.

While Palantir sells its AI analytics services in the commercial market, 42% of the company's revenue comes from contracts it has with the U.S. government. And business is booming there. Revenue from services sold to the federal government spiked 45% in the first quarter to $373 million. What's more, commercial sales rose 71% to $255 million, helping the company diversify its revenue sources.

A sky-high valuation amid AI euphoria

Some investors have taken to completely ignoring valuations in the current market. That's because the S&P 500 soared 65% over the past three years, making lots of stocks look expensive. Those big gains have made traditional valuation comparisons a little more difficult than in the past. Additionally, companies directly tied to the AI boom are getting a free pass on their valuations as investors choose not to miss out on these stocks' historic growth.

I understand this sentiment. But I'd also warn that throwing caution to the wind could backfire on some investors. Palantir's stock has a price-to-earnings ratio of 260, an astronomically high valuation by nearly any measure. The fact that Palantir is expanding its revenue, earnings, and customer base only serves to prove to some investors that the high price is worth it.

That may be, but it's also worth pointing out that Palantir's stock can be extremely volatile. The most recent example is from February, when shares soared more than 40% and then subsequently gave up nearly all of those gains in a matter of four weeks. Some investors were concerned about a potential pullback on government spending that might impact Palantir, and quickly exited their positions.

Stock volatility is normal for many growth stocks, so it's not to be completely avoided. But if you're buying Palantir right now, when the stock has already surged and its valuation is sky-high, you should know that substantial drops could come on shifting macroeconomic data or even some non-important company news.

That doesn't make Palantir a bad investment, but if you do buy its stock now, it might be best to start with a small position and add to it if shares pull back.

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Chris Neiger 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.