One of the top artificial intelligence (AI) stocks to own this year has been Palantir Technologies (NYSE: PLTR). Its new AI platform, AIP, has unlocked major opportunities for the business, and revenue growth is accelerating, fueling bullish investor sentiment around the business. And now that the tech stock has joined the S&P 500, there's even more excitement surrounding Palantir, and its stock hit a new 52-week high on the news.
Today, the stock is fast approaching its all-time high thanks to a 141% year-to-date gain. Is it too late to invest in this scorching-hot AI stock, or can shares of Palantir go even higher?
Investors are paying a big premium for Palantir
Palantir's platform has ranked well in a report from Forrester Research, and it appears to be a top vendor for AI solutions that help customers automate processes and make better decisions along the way. The data analytics company has routinely announced deals with new customers.
In the quarter ended June 30, Palantir's revenue was up 27% year over year with particularly strong growth in its U.S. commercial segment where sales jumped 55%. For full-year 2024, the company expects its U.S. commercial business to grow at least 47%, while its top line will come in at around $2.75 billion for an overall growth rate of 23%.
These encouraging results suggest the business is moving in the right direction. But with the stock trading at 244 times trailing earnings and 40 times revenue, do investors have to pay too high of a premium for the business? Is it worth it given the potential headwinds?
Why Palantir's business may slow down in the near term
Palantir's hefty valuation means a lot of future growth is priced into its shares, and any bump or hiccup along the way could derail the stock. Investors shouldn't forget that in 2022, bearishness across the tech sector sent Palantir stock tumbling 65% for the year.
It has recovered and business looks good now, but weakening economic conditions could result in companies cutting back on AI-related spending. Meanwhile, the U.S. government is looking to tap more tech companies so it isn't as reliant on a single vendor, according to a report from The Wall Street Journal earlier this year. Government revenue still accounts for the majority of Palantir's top line, but it grew at a slower 23% pace last quarter, meaning the commercial segment is catching up quickly.
Should you buy Palantir stock?
Palantir's business looks a lot safer than it was a year or two ago now that the company is routinely posting profits. But at such an inflated valuation, it may be difficult for the stock to outperform in the long run.
The excitement around the S&P 500 inclusion has given shares a boost, but ultimately, the stock's fortunes are tied to growth. And Palantir isn't growing at a rate high enough to justify paying such mammoth earnings and revenue multiples for the stock.
With this amount of hype priced into the stock already, there is a very real risk of a future correction. Even if you're buying Palantir with a long-term mindset, there are better AI stocks out there.
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David Jagielski 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.
Up 141% This Year, Can Palantir Technologies Stock Continue Soaring Higher? was originally published by The Motley Fool