Is Palantir Stock a Buy?

2024 has been the year of Palantir (NASDAQ: PLTR). The stock has climbed nearly 342% year to date as of this writing while also gaining admittance to both the S&P 500 and the Nasdaq-100 indexes.

Here's the question on everyone's mind, though: Is the stock still a buy heading into 2025?

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High potential at a high valuation

When looking at Palantir, one of the first things that stands out is its valuation. The stock's momentum this year has led it to trade at a forward price-to-sales (P/S) ratio of nearly 50 times 2025 analyst estimates. If we take out its nearly $4.6 billion of net cash and use an enterprise-value-to-sales multiple (EV/S), it still trades at 45.5 times. Meanwhile, the company grew its revenue by just 30% year over year last quarter and forecast revenue growth of 27% at the high end of its guidance for Q4.

By comparison, at the peak of software-as-a-service (SaaS) valuations, SaaS stocks traded at a nearly 20 EV/S multiple while growing revenue in the low- to mid-30% range. Palantir is currently trading at more than twice that valuation with slightly slower revenue growth.

PLTR PS Ratio (Forward 1y) data by YCharts

While its stock is expensive, Palantir does have several strong qualities. One thing that separates it from a typical SaaS company is that it is very efficient with its sales and marketing, which is what many SaaS companies use to help drive sales. Last quarter, Palantir's sales and marketing expenses rose by just $7.1 million, or 4%, while its revenue soared by nearly $100 million, or 30%. That's extremely efficient and should help eventually lead to very strong earnings.

Meanwhile, the company is just starting to tap into what could be a massive opportunity with its artificial intelligence (AI) platform. The company had previously established itself as a vital data gathering and analytics vendor for the U.S. government, which has used its platform to help fight terrorism and track COVID-19 cases. However, with its new AI platform, it has started to rapidly expand into the commercial sector by being able to address a lot of different use cases across various industries. Meanwhile, the government has also started to embrace the use of AI as well.

Palantir's early AI success can be seen in the growth of its U.S. commercial revenue, which jumped 54% last quarter to $179 million. Its U.S. commercial customer count, meanwhile, soared 77% year over year. However, its big opportunity is moving these new customers from prototype (proof-of-concept) work into production (real-life applications).

While a lot of early AI focus has been on building out AI infrastructure and training AI models, Palantir's secret sauce in the AI race is in the application and workflow layers. The application layer helps with logic and functionality, while the workforce layer deals with the actions needed to complete tasks. The key to its AI platform is Palantir Ontology, which becomes the operational layer of an organization. This helps map out the digital assets that are integrated into its platform, such as datasets and models, and connects them to their real-world counterparts, such as products and customer orders.

Through this and the rigorous testing and evaluation tools within its platform, Palantir says it can quickly move customers from proof-of-concept to AI software solutions that can help manage mission-critical tasks in real-world situations with full transparency and without the negative impact of AI hallucinations. AI hallucinations are when AI models start to come up with inaccurate and sometimes nonsensical outputs. This is one of the major current issues with AI, with estimates that AI chatbots can hallucinate between 3% to 27% of the time. As such, being able to manage and mitigate these hallucinations is vitally important as companies look to use AI technology in real-world applications.

Much of Palantir's early commercial success has been with prototype work. So, as it moves these new customers to real-world AI software solutions, it has an opportunity to greatly accelerate revenue in the future.

Image source: Getty Images.

So, is Palantir a buy?

Palantir has a large potential opportunity in front of it. However, with the stock trading at a P/S multiple of nearly 50 times, a lot of future growth is already priced into the stock. Meanwhile, it will need to grow its revenue much quicker than 30% and over a sustained time to justify its current valuation.

Analysts predict Palantir will grow its revenue by just over 24% next year. That seems low and easily beatable, but I think investors already expect a lot more revenue growth than the analyst consensus, given its current valuation.

While I think the company has the opportunity to greatly accelerate its revenue growth, its valuation leaves little room for error. As such, I would not be a buyer at current levels and think investors could be wise to at least take some partial profits.

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Geoffrey Seiler 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.