Palantir's Stock Is Up 161% This Year. Is It Too Expensive to Buy?

Let's face it: Palantir (NYSE: PLTR) is irresistibly cool. How could it not be? The company's name is straight out of The Lord of the Rings; its flagship product's name, Gotham, is straight out of a comic book; and its primary goal -- using artificial intelligence (AI) to identify and stop terrorist threats that would have been missed by human agents -- could be straight out of Mission: Impossible.

The stock is up 161% year to date, and that AI-based "cool factor" is likely part of why it's gotten investor's attention lately. After all, many investors clearly think AI stocks are pretty attractive, but some -- lookin' at you, c3.ai and Super Micro Computer -- have tumbled recently as they failed to live up to lofty expectations. Palantir, on the other hand, hasn't disappointed... yet. But as these other companies show, "cool" alone won't keep investors satisfied. Can Palantir's share price keep going up, or is it already too expensive to buy, no matter how cool it is?

Fast-growing revenue

Palantir's revenue growth has been surprisingly steady for such a young company, but that doesn't mean it hasn't been strong. In the most recent quarter, revenue was up 55% from the prior year. However, most of that revenue is coming from essentially a single client: the U.S. government, which provides 75% of Palantir's current revenue.

Palantir provides its Gotham threat-management software to numerous U.S. defense and intelligence agencies, allowing Gotham to access siloed data from across the agencies' systems and analyze it comprehensively. Naturally, the more agencies that use Gotham, the more data it can analyze, and the better its results become. This scaling of benefits serves as a competitive moat to the company's government revenue. In order to switch to a new system from Gotham, multiple agencies would have to approve of the switch and allocate resources to making it happen, which would be an expensive and complex process.

In addition to its steadily increasing government revenue from Gotham, Palantir has rolled out a number of commercial products for its growing number of corporate customers. The first of these products, named Foundry, operates similarly to Gotham, leveraging AI to analyze siloed information -- in this case, within different departments or business units of a company. The company's commercial products are popular -- commercial revenue growth has actually outpaced overall revenue growth. In its most recent quarter, Palantir's commercial customer count grew 83% year over year.

Faster-growing share price

Whether it was because of the company's impressive growth numbers or its cool factor, investors started to take notice of Palantir last year. The company's stock price, which was below $6.50 a share at the start of 2023, currently sits above $42 a share -- a more than 500% return. That gives the company a market capitalization of just under $100 billion on trailing-12-month revenue of just under $2.5 billion.

That's a lofty valuation, even for a fast-growing company. It gives Palantir a price-to-sales (P/S) ratio of about 41 times sales. By comparison, even tech giant Nvidia, which is also expected to benefit from continuing growth in AI, only trades at about 36 times sales. Other data-related companies are nowhere near as highly valued. Datadog only has a P/S ratio of 19 times. Snowflake sits at 12 times, and all three have grown their revenue faster than Palantir over the past year.

Is it still a buy?

Palantir has gotten a lot of attention recently as a result of its addition to the S&P 500. That -- plus the cool factor -- is probably contributing to the stock's lofty valuation. Hot growth stocks that are priced for perfection often see a correction at the first sign of a potential growth slowdown. Datadog and Snowflake are both good examples. At the end of 2021, Datadog's P/S ratio was over 60, and Snowflake's was over 100. They couldn't sustain those valuations, and their share prices tumbled. I wouldn't be surprised to see something similar happen to Palantir as the growth of AI empowers potential competition for government AI spending.

That said, as the clear first mover in this space, and as a company that seems to be experiencing rising demand for its products and successfully expanding into new markets, Palantir is poised for success over the long term. I like its prospects for future growth, even if it might take longer than I'd like for it to justify its lofty valuation.

Bottom line, I would buy Palantir to hold for the long term, but given its sky-high valuation, there are other companies I'd buy first. I'll keep Palantir on my watch list to reconsider if its share price drops.

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John Bromels has positions in C3.ai, Datadog, Nvidia, and Snowflake. The Motley Fool has positions in and recommends Datadog, Nvidia, Palantir Technologies, and Snowflake. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.