The Palantir Technologies (NYSE: PLTR) share price has been on fire lately. From a low of $6 in early 2023, the growth stock has surged 440% to reach $34. It’s up 102% this year alone and is near a record high!
Palantir shareholders got another reason to cheer recently when it was announced that the artificial intelligence (AI) and data analytics company would be joining the prestigious S&P 500.
Clearly things are going very well. So, should I add this growth stock to my portfolio? Let’s take a look.
An unconventional business
Co-founder and CEO Alex Karp celebrated the firm’s S&P 500 inclusion in a YouTube video. Dressed in running gear and holding pink trekking poles in a forest, he said some on Wall Street had seen Palantir as “a Frankenstein monster powered by a freak show leader“. But now, he added, “The rebels [had] won“.
Named after the ‘seeing-stones’ in J.R.R. Tolkien’s fantasy series, Palantir employs an unorthodox management style (Karp occasionally leads meditation sessions at the firm).
Clearly, this isn’t your average company, and I like that.
But how does it make money? Well, Palantir is a software business that helps organisations make informed decisions by identifying patterns in huge amounts of data.
It operates two main platforms: Foundry is for commercial enterprises, while Gotham is used by government and defence. Both analyse large datasets to drive insights.
To give two examples, its software was used to help locate Osama bin Laden and to track US Covid cases.
Blue-chip customers
The company works with the FBI, CIA, and the UK’s Ministry of Defence. Last year, it won a five-year contract to create a massive data platform for the NHS.
It also has contracts with multiple blue-chip companies. On 9 September, for instance, it signed a five-year deal with BP to help the energy giant use AI to speed up engineering decisions.
Revenue growth has been robust for years, rising from $742m in 2019 to $2.2bn in 2023. In the first six months of 2024, revenue increased 24% year on year. Strong stuff.
But to join the S&P 500, a company must meet several criteria, including having positive earnings in its most recent quarter and over the past four quarters combined.
On this front, the company has made great strides, turning profitable for the first time last year. And Wall Street now expects earnings to grow by an average of 30% annually over the next three to five years.
Should I buy Palantir stock?
A lot of recent investor excitement has centred around the firm’s AI platform. This provides predictive models and automates complex processes. It helped drive Palantir’s US commercial revenue 55% higher in the second quarter.
My worry here is valuation. The stock is trading on a forward price-to-sales (P/S) multiple of 27. That’s higher than Nvidia, which is currently growing faster. The forward price-to-earnings (P/E) ratio is 82!
Clearly then, Palantir is priced for sky-high future growth. But a lot could go wrong, from data privacy issues to a slowdown in government contract wins (the US government accounts for over half the firm’s revenue).
This is undoubtedly a top-notch AI company growing very healthily. But as it’s frothily valued, I’d rather buy other growth stocks for my portfolio.
