Palantir (PLTR 7.66%) has focused on artificial intelligence (AI) since the company’s inception. As a result, its AI tools are ahead of many others in its industry, which is why Palantir was ranked #1 in a survey of AI, data science and machine learning platforms carried out by Dresner Advisory Services.

But Palantir’s AI tools were primarily focused on government, so getting commercial companies to adopt its AI tools was critical to expanding into a broader market. This is a cornerstone of Palantir’s investment thesis, and after hearing what management said on its most recent earnings conference call, it looks like a success story.

Commercial adoption in the United States is a key metric to watch

At its core, Palantir’s AI program collects huge amounts of data and provides recommendations to its users on the most optimal decision. This technology is useful in many industries, whether the government uses it for the military, a hospital uses it for dispatch, or a company deploys it to manage its supply chain.

Its latest technology, AIP (artificial intelligence platform), is a large language model that allows its users to ask the software questions. This is another way for customers to deploy Palantir’s powerful AI technology and help them make the best decisions possible in the moment.

While these products are certainly innovative and fascinating, if they don’t sell, they are a waste of business time. But Palantir is seeing remarkable adoption in the United States, as noted during its latest quarterly conference call:

Excluding strategic commercial contracts, our U.S. commercial business grew 52% year-over-year and 19% sequentially, and three-quarters of our quarter-over-quarter growth came from customers who started with us in 2023. Our number of commercial customers in the United States has increased. 12% from one quarter to the next and it is now ten times more than just three years ago.

This quote, “three-quarters of quarter-over-quarter growth comes from customers who started working with us in 2023,” really amazes me. This shows that AI adoption in the United States is happening at an incredible pace, which bodes well for a company like Palantir.

But even if U.S. business is doing well, is this an investable stock?

The stock is very expensive due to its growth rates

Despite the success of growing commercial revenue in the United States, government contracts still account for the majority of Palantir’s revenue (55%). Government revenues grew only 12% compared to 23% for commercial, leading to an overall growth rate of 17%.

Another key consideration when investing in Palantir is its profitability. In the fourth quarter of last year, Palantir reported its first GAAP earnings per share (EPS), and this third quarter marked the first time that Palantir generated EPS above $0.01. While Palantir’s earnings per share of $0.03 isn’t huge, it shows that the company is committed to steadily increasing its profitability.

Yet with the hype around AI and Palantir’s growing profitability, many investors are excited about the stock, leading to a high valuation.

PS PLTR ratio table

PLTR PS ratio data by YCharts

Regardless of how much you value the company (profits or sales), the shares are far from cheap. Additionally, with Palantir expected to grow its revenue by 18% next quarter, its growth is slower than its price-to-sales (P/S) valuation. Usually companies are growing at least two to three times faster than their P/S, so this is a concern for me.

While Palantir has a great product and executes well, I think the title has gotten too far ahead of itself. Accordingly, I will pass on the stock for now. I may reconsider if the stock is diving due to valuation (and not a business event like a sales slowdown or contract loss). But right now, it’s simply too expensive to buy unless growth picks up.

Keithen Drury has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published. Required fields are marked *