The tech company’s massive potential to grow its private-sector business has driven sizzling share price gains.
Artificial intelligence (AI) software stock Palantir Technologies (PLTR -2.75%) is on fire. Shares have risen over 80% during the past year, including a 20% gain over the past month. Wall Street is excited about the company’s future. Its custom software proves valuable in real-world situations, and its robust business performance backs that up.
No matter how good the story sounds, however, it’s only fair to question the stock’s investment prospects after such a staggering run-up. Investors should always look for quality companies, but price matters too. So, is Palantir stock still a buy now?
The technology is hazy, but the results are clear
Palantir specializes in building custom data analytics software on its three development platforms: Gotham, Foundry, and its Artificial Intelligence Platform (AIP). The company cut its teeth working with the U.S. government, and it still gets more than half its revenue from government contracts, especially from the U.S. Department of Defense. Since the company went public, it has pushed more energetically into the corporate sector, and it’s finding success there. In Q1, its U.S. commercial customer count rose 69% year over year to 262.
Custom software is a complex product, and the nature of the applications Palantir sells is often confidential or private. Some might call Palantir a black box because it’s difficult to see its inner workings. However, it delivers real-world outcomes for its customers that make its products’ value crystal clear.
One such example is the company’s recent contract expansion with Tampa General Hospital. In 2021, it implemented AIP software to develop a new platform to manage bed placement, patient itineraries, and staffing, and the resulting improvements in efficiency dramatically reduced patient wait times and stay durations. More efficient hospitals deliver better care and make more money. Tampa General began its relationship with Palantir using its software for a single use case — it has since expanded that to over a dozen.
That’s just one example, but it underlines how much value Palantir brings to its customers. There is a reason why the U.S. government continues to award it new contracts, including a recent $480 million contract with the U.S. Army to develop an AI system prototype.
The details of its products may be a bit mysterious, but the circumstantial evidence speaks volumes about Palantir’s product quality.
Immense long-term private sector upside
With offerings versatile enough that they can go from optimizing hospital systems to running cutting-edge Army technology, Palantir has a massive market opportunity. And when a company can grow its customer count by 69% in a year, that’s a clear indication that there’s demand for what it offers. The combination of all these factors helps explain the stock’s recent momentum.
The question is just how much growth could be ahead.
Not every company that might benefit from Palantir’s software can afford it. Contracts routinely exceed $1 million in annual value, so new clients will likely be large enterprises with deep pockets. Even Tampa General Hospital is a major business with an estimated annual revenue of $1.1 billion.
Fortunately, there is still a plethora of these companies out there. Crunchbase says nearly 10,000 organizations are doing between $1 billion and $10 billion in annual revenue. Remember, Palantir’s total commercial customer count in the U.S. is just 269. The company could multiply its customer base and still have thousands of prospective clients left untapped.
This is great news for long-term investors. The company could have enough opportunities to grow for years to come.
Is Palantir stock a buy now?
Those who have held Palantir stock for a while have enjoyed the stock’s 80% run-up these past 12 months, while prospective investors are left weighing its increasingly expensive valuation. Shares have floated to a forward P/E ratio of 83. The company would have to deliver impressive earnings growth to justify such a price tag.
Right now, analysts believe the company will grow its earnings at an annualized rate of nearly 24% over the next three to five years.
PLTR PE Ratio (Forward) data by YCharts.
I like using the PEG ratio to compare a company’s expected earnings growth to the stock’s valuation to see if it’s a good deal. Generally, I look for PEG ratios between 1.5 and 2.0 or less, which I consider fair value for a great business.
While Palantir seems like a quality company, its PEG ratio is nearly 3.5 today, indicating that the stock has become too expensive. Investors may want to wait for a pullback to buy shares.
Justin Pope 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.