Why Palantir Stock May Not Be the AI Winner It Seems

4 Min Read

Valuation matters, and Palantir’s recent profitability run needs to be sustained.

In the AI arms race that has been building in financial markets, investors have honed in on a few specific names to ride this wave higher. The stock that has gotten an increasing amount of interest of late is Palantir (NYSE:PLTR) stock.

This surge in interest has led PLTR stock to more than double on a year-to-date basis, and it remains relatively strong compared to other AI-related names right now.

So, the question moving forward for the growth investor is whether Palantir is still worth buying at these levels, or if its rally is mostly over.

It’s my view that the company’s recent relatively robust earnings and forward outlook may be too optimistic, relative to the company’s track record.

Let’s dive into why Palantir may be a stock investors want to be cautious with right now.

Palantir’s long-standing strategy, for decades, has been to pursue growth in favor of profitability. Founded in 2003, Palantir’s first ever profitable quarter was Q4 2022, 20 years later. That’s a long time for investors who put money to work in this company two decades ago to wait for a return.

While interest around AI companies is peaking right now, and the forward-looking prospects for companies like Palantir that make AI and machine learning systems for government agencies and other corporations may seem bright, I think some caution is warranted.

Yes, the company has posted three consecutive profitable quarters. However, this profitability is very slim, and it’s clear the company has managed its books to show it can remain profitable, if not simply breakeven, for a period of time.

Until the company can show substantial profit growth, this is a name I think investors need to be wary of. Indeed, 13% revenue growth is great, but when that’s matched with a 13% increase in costs, it’s clear that the company doesn’t really have the pricing power many would expect.

The bottom line with Palantir is valuation matters. Yes, PLTR stock has rallied nicely this year. However, at roughly 15-times sales, this is a stock that’s priced for perfection.

If the company doesn’t continue to churn out impressive top- and bottom-line growth, it’s a company that could see significant downside.

Indeed, PLTR stock is down roughly 25% from this year’s high, for these reasons. A Morgan Stanley (NYSE:MS) downgrade, tied to the company’s valuation, has signaled to some conservative investors that this is a stock worth steering clear of.

It’s my view that Wall Street analysts are being appropriately cautious with this name.

However, retail investors appear to view this stock as a post-modern meme play with some serious momentum to ride. That’s a trade that’s worked, for now.

However, I think at some point the momentum will fade, and investors playing the artificial intelligence space will focus only on companies with significant (and expanding) margins. Palantir isn’t one of these companies.

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