This has been an excellent year for shareholders of Palantir Technologies (NYSE: PLTR). In less than 11 months, the company's stock soared 162% based on AI optimism and rising geopolitical uncertainty, which could increase demand for its unique brand of military- and intelligence-focused data analytics software.
But does Palantir's new valuation match its fundamentals? Let's dig deeper to find out if the stock is still a long-term buy.
A unique spin on software as a service
Software-as-a-service (SaaS) companies are popular with investors because, if done properly, the business model can generate stable recurring revenue. Their economic moats can also become stronger over time as existing clients become used to their workflows and are less willing to switch to rival platforms.
Palantir's SaaS business focuses on machine learning and big data analytics to help organizations process large amounts of information to uncover insights and efficiencies. It combined these technologies with the large language models (LLMs) behind platforms like ChatGPT to help its clients make real-time decisions.
It is far from the only company tackling data analytics and generative AI, but it is unique because of its focus on government, military, and law enforcement clients, which might use its software in ways that are too politically sensitive for the typical company.
Palantir is known for helping the U.S. government track down Osama bin Laden more than a decade ago. More recently, it took on a controversial contract with Immigration and Customs Enforcement to provide profiling tools during the Trump administration, despite a media backlash.
The company is also working on the U.S. Army's Maven targeting system -- a program Alphabet might have been pressured to abandon because of its controversial nature.
Palantir has a significant opportunity to expand its contracting business as the geopolitical situation becomes more tense. The company already has contracts with the armed forces of Ukraine and Israel.
Business momentum remains strong
Most of Palantir's 2024 rally can be credited to growing geopolitical uncertainty and hype surrounding AI-related companies in general. That said, it also enjoys strong operational momentum: Second-quarter revenue jumped 27% year over year to $678 million, driven by demand for its data analytics software platforms.
Most of Palantir's most recent growth isn't coming from the government clients that made it famous. Now, the private sector is driving expansion, especially in the U.S., where commercial revenue rose 55% year over year to $159 million (around 23% of the total).
That booming commercial business suggests the controversies surrounding its government work aren't hurting its reputation and might even give it more credibility.
That said, the company's increasing reliance on private sector growth will force it to compete with well-capitalized rivals. These include the world's biggest SaaS company, Microsoft, which enjoys more name recognition and a likely more-advanced AI business because of its part ownership of industry leader OpenAI, the maker of ChatGPT.
Palantir's valuation is hard to justify
A good company isn't always a good investment. And that's why potential buyers should look closely at the business' valuation when deciding whether or not to bet on the stock.
With a forward price-to-earnings ratio (P/E) of 100, calling Palantir "priced for perfection' sounds like a misnomer. It towers over the S&P 500 average of 25 and even Microsoft, which trades for a forward P/E of 32. With this in mind, Palantir stock looks unlikely to maintain this market-beating rally, and current investors might want to take profits.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Up 162%, Is Palantir Stock Still a Buy? was originally published by The Motley Fool