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Palantir Technologies Inc Cl A(PLTR-N)

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Palantir Stock: Bull vs. Bear

Motley Fool - Wed Nov 29, 2023

Palantir Technologies(NYSE: PLTR) has been a battleground stock since the company had its initial public offering in September 2020. While the data analytics and artificial intelligence (AI) company's share price is still down 51% from its all-time high, it has been putting up a great performance in 2023. The stock is up roughly 199% year to date.

In the wake of that gain, is Palantir stock still worth buying? Two Motley Fool contributors offer contrasting views.

The bull case: Palantir is a clear leader in AI

Keith Noonan: While the shock of AI's big leaps forward over the last year may have dissipated somewhat, it's important to keep in mind that this revolutionary technological shift is still just starting to unfold. Palantir built an early lead in its corner of the AI, analytics, and data services space, and its competitive advantages look likely to become more pronounced as new customers sign on and scale their usage of its platforms.

Strengthening the bull case for the stock, Palantir has already demonstrated significant fiscal performance improvements even with the AI tailwinds still just starting to intensify. The company posted losses for most of its history, but it has now recorded four consecutive quarters of profitability on a GAAP (generally accepted accounting principles) basis. Its sales growth is also accelerating again.

After growing its top line by roughly 13% year over year in the second quarter, Palantir recorded a 17% revenue increase in Q3. It also ended Q3 with its customer count up 34% year over year, and the potential is there for strong sales growth to continue as clients that have recently been onboarded ramp up their use of the company's services.

With the AI revolution still young, the long-term sales and earnings outlook for the business is promising. Among large companies and government agencies, there's incredible demand for the types of technologies that Palantir is at the forefront of. AI services are at the center of forward-looking operational needs and growth strategies for these organizations.

The bear case: The stock is priced for perfection

Parkev Tatevosian: My bear case for Palantir stock centers on its lofty valuation. Admittedly, the AI company's performance does warrant a premium share price. However, the current premium -- it trades at a one-year forward price-to-earnings ratio of 65 -- is overextended.

PLTR PE Ratio (Forward 1y) Chart

PLTR PE Ratio (Forward 1y) data by YCharts.

To make matters worse, Palantir's revenue growth decelerated significantly, falling from a 49.1% pace in the second quarter of 2021 to 12.7% in Q2 2023. Sales grew 17% in Q3, but that was down from a 22% pace in the prior-year period.

While this might not be an issue for most stocks, they are for a stock that's trading at a one-year forward P/E of 65. When I'm buying a product at the store that's selling at a bargain price, I'm willing to accept a few undesirable qualities. Maybe the color is not completely to my liking. Perhaps the size is a little off. But if I'm paying a top price, I want everything to be top tier.

That's really my only argument against Palantir. The company is on the cutting edge of artificial intelligence. It has increased its operating income each quarter this year, and it is on pace to reach profitability. If the stock were selling at a forward P/E closer to 30, I would recommend it as an excellent stock to buy. Unfortunately, I think the risk/reward balance is unfavorable to long-term investors at its current valuation.

Is Palantir stock a smart buy right now?

Palantir has a strong position in the rapidly evolving AI space, but the stock also trades at a valuation that has some strong future performance baked in. For investors who are concerned that valuations for AI stocks have already become stretched, investing in Palantir right now may not be the right move. Additionally, investors who are generally more risk-averse may see the stock as simply having too much downside potential right now.

On the other hand, Palantir's strengths in AI could bear fruit over time and become even more pronounced over the long term. If the company continues to score wins with customers in the public and private sectors, and if it continues to improve its margins, its share price has the potential to climb far above current levels. For risk-tolerant investors looking for potentially explosive AI plays, the stock could be a worthwhile portfolio addition.

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Keith Noonan has no position in any of the stocks mentioned. Parkev Tatevosian, CFA 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.

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