Palantir Stock Analysis: A Tricky Balance of AI Hype and Valuation Concerns

Palantir Technologies (NYSE:PLTR) is among the key beneficiaries of the recent AI-driven rally, with PLTR stock surging 167% last year and 36% this year before first-quarter earnings.

Since then, Palantir stock price has been on the decline, losing around 18% post-earnings.

Investors have much to consider regarding this AI stock. Palantir’s valuation has surged due to its growth and profitability prospects. Bears are growing concerned about valuation.

The company is gaining new contracts, like the $480 million Maven AI contract, which could accelerate its growth.

Let’s dive into which side of the trade investors may want to be on right now.

Recent Bullish Stock Movements

Palantir stock has been on the rise, surging an impressive 29% since the beginning of the year, more than doubling the Nasdaq’s 14% year-to-date gain.

Palantir’s performance over most time frames since the beginning of 2023 has signaled outperformance, with this company clearly on the top of investors’ minds (at least those focused on growth).

Such a view certainly makes sense when assessing the company’s recent Q1 earnings report. The company announced commercial revenue surged 40% year-over-year to $150 million in the quarter, with Palantir adding 41 customers.

That number was up 19% sequentially, and suggests the company’s active promotion of its artificial intelligence program to commercial clients is paying off.

Despite a relative slowdown in Palantir’s government business, it’s this commercial segment investors are clearly latching onto as the growth story right now.

If earnings and revenue growth are going to accelerate, it’s going to be this piece of the pie that grows. Thus, there’s plenty to like about Palantir’s recent rally, considering the fundamental drivers behind this move.

Now, valuation concerns remain abundant, as the stock trades at a price-sales ratio over 17-times.

If Palantir’s growth rate accelerates, this metric should drop. But that’s a big question mark, and it all centers on the company’s ability to execute in its commercial segment.

AI Growth

Despite its quirks, Palantir offers compelling investment reasons. The company’s AIP has driven growth, especially in the private sector, with U.S. commercial customers up 69% year-over-year in Q1.

Additionally, strategic alliances, like its recent partnership with Oracle (NYSE:ORCL), present lucrative opportunities not yet reflected in current results.

Palantir Technologies secured a $480 million Army contract to extend the Maven Smart System globally, part of Project Maven. It automates target detection using diverse data sources. The five-year deal expands usage to thousands of users across five combatant commands and the Joint Staff.

Palantir’s Shannon Clark, head of defense growth, revealed on May 30 that Maven’s users would range from intel analysts to Pentagon leadership.

Maven contributes to the Pentagon’s Combined Joint All Domain Command and Control concept, enhancing data integration across military environments.

The system participated in DOD exercises, including the Global Information Dominance Experiment series.

I’m Taking a Cautious Approach to PLTR Stock

Palantir’s AI-related tailwinds are certainly enticing, and there’s a reason this stock is trending higher over the past two years.

Palantir is now a profitable company, and could see continued earnings and cash flow growth over time. That’s what most investors in this name are here for.

The thing is, in order for Palantir to see substantial stock price appreciation from here, its AIP offerings need to see continued strong growth.

Handicapping where Palantir’s future quarterly growth numbers will come in at is difficult, given where we are in the current AI life cycle. It’s possible the market could be underestimating the company’s potential, but there’s undoubtedly a high bar to climb.

Accordingly, I’m cautiously optimistic on Palantir’s prospects at current levels.

I think this is a stock that certainly could catch fire once again, but it’s also one that could see significant downside if commercial spending ramps down (as macro headwinds potentially ramp up).

For now, I think the more dangerous side of the trade to be on is the short PLTR stock side of the ledger. But we’ll see.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.