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Every so often, a stock captures the imagination of investors like few others can. The company's technology promises to be so innovative, so disruptive, that investors are willing to pay incredible multiples, believing that future returns justify massive current valuations.
Palantir Technologies (NASDAQ: PLTR) is one such company. The artificial intelligence (AI)-powered juggernaut saw its stock price rise more than 1,200% in the last two years as it rode a wave of AI enthusiasm. Its ardent supporters believe that the company and its technology are leading a true paradigm shift. But is the hype justified?
An open question
There is a pressing question hanging over Wall Street: Can AI deliver enough value to justify the gargantuan sums of money tech firms are pouring into developing the technology?
It's an expensive business, building and operating the data centers that enable modern AI applications like ChatGPT to run; this year, the big tech companies that do so are set to spend well over $300 billion on AI-powering infrastructure. The same companies spent $230 billion in 2024.
Palantir is proving AI can deliver true value
It's no surprise then that shareholders are eager to see a return on their investment -- one that is commiserate with the massive amount of spending. A tree that costs hundreds of billions of dollars had better bear some pretty expensive fruit.
Palantir appears to be proving AI can deliver that kind of value -- or at least it's on a path to do so. In a market awash in smoke and mirrors, Palantir is expertly leveraging AI to enhance the operations of clients as diverse as Ferrari and the U.S. Army. Its client growth has been explosive, reflecting the immense value and broad application of its technology. Its sales have followed suit.
Take a look at the year-over-year growth over the last four quarters.
|
| Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
|---|---|---|---|---|
| Customer growth (YOY) | 42% | 41% | 39% | 43% |
| Sales growth (YOY) | 21% | 27% | 30% | 36% |
Data source: Palantir Technologies.
Palantir is also a very profitable company. Over the same period, the company nearly doubled its earnings per share (EPS) and raised its net margin from 36% to 39%.
Valuation matters
It is clear that Palantir is delivering substantial value, growing its business rapidly, and managing costs. I won't begin to deny that the company is executing at the top of its game. When all these are true, it's completely reasonable for investors to pay a premium for the stock.
However, Palantir's current valuation, by almost any metric, is so extreme that investors have to proceed with caution. Palantir's price-to-earnings ratio (P/E) of 446 is astronomical. Leading players in tech like Alphabet and Microsoft carry P/Es of roughly 30. No, this isn't apples to apples, as the latter two are mature companies, but it's still useful to keep the numbers in perspective.