For portfolio exposure to the data analytics, cybersecurity and artificial intelligence (AI) industries, you may be considering Palantir Technologies (NYSE:PLTR) stock right now. That’s understandable, but be careful. Investing in Palantir during a time of AI-market exuberance may be a costly mistake.
Don’t get the wrong idea. It could be a great idea to buy Palantir stock at the right time and at the right price. Patience will pay off big time, so weigh the downside risk versus the upside potential before jumping into a share position in Palantir Technologies.
Is PLTR Stock Overhyped?
Looking through Palantir Technologies’ previous quarterly earnings results, it’s evident that the company is profitable but only by a few pennies per share. Being income-positive by a few cents per share isn’t a spectacular result when PLTR stock is over $15.
Sure, Palantir has government contracts, and that’s a bullish factor to consider. Optimistic investors could point to a U.S. Army contract, for example, that could be worth up to $115.04 million.
Yet, this doesn’t mean Palantir is making money hand over fist. As Mark Holder of Stone Fox Capital pointed out, Palantir reported third-quarter 2023 revenue growth of “only 17% and guided to Q4 growth in the 18% range.” Holder further contended that “[e]nterprise AI software companies” like Palantir Technologies “are not seeing aggressive spending from corporations.”
All in all, I tend to concur with Holder’s “AI overhype warning,” as he warned that PLTR stock “trades at 13x ’24 sales targets.” That’s alarming, and so is Palantir’s GAAP-measured trailing-12-month price-to-earnings (P/E) ratio of 238.39x.
Palantir and AI: The ‘Hype Is Ahead of the Reality’
Holder isn’t the only Wall Street expert sounding the alarm on AI hype as it pertains to Palantir Technologies. Jefferies Analyst Brent Thill took an equally cautionary tone, stating that the hype associated with AI’s growth “is ahead of the reality.”
Granted, Thill perceives that Palantir Technologies “has an AI technology advantage in the long-term.” At the same time, the Jefferies analyst is concerned that PLTR stock “has rallied to unsustainable valuation levels primarily on the back of AI euphoria (and retail trading momentum) with no monetization strategy.” The aforementioned P/E ratio tends to support Thill’s valuation-related concerns for Palantir.
What about Palantir’s government contracts, though? Thill addressed that topic, declaring that “government business” are “decelerating” with “still no update on the recovery timeline.”
Consequently, Thill sees “more pressure being put onto [Palantir’s] commercial business segment to drive overall growth.” That’s a problem, Thill continues, as Palantir Technologies “has yet to deliver enough positive data points to prove its execution in its commercial [go-to-market] strategy.”
Palantir Stock at $13 Would Be a Buy
Holder raised a great point about Palantir Technologies’ revenue growth, which is decent but not spectacular. Moreover, Thill’s concerns about Palantir’s less-than-stellar commercial-business growth are worth noting. To all of that, we can add Palantir’s lofty P/E ratio as a red flag.
Note that neither Holder nor Thill really hates Palantir Technologies. In a similar vein, I’m bullish about AI-enabled software and Palantir for the very long term.
At the same time, it’s important for stock traders to buy at reasonable prices. So, what’s a reasonable buy price for PLTR stock? If it gets down to $13, Palantir Technologies’ valuation should be more acceptable. Then, investors can start a share position, but be ready to buy more if the stock price continues to slide.
On the date of publication, David Moadel did not have (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.
