Palantir Technologies (NYSE: PLTR) is a stock I’ve considered a handful of times in the past couple of years. However, I’ve never added it to my ISA.
In hindsight, that’s been a mistake, as shares of the data analytics firm are up 275% in 2024!
That even blows Nvidia out of the water, though the chipmaker isn’t doing too badly itself after a 187% year-to-date rise. Both companies are benefitting massively from the artificial intelligence (AI) boom.
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Is it high time I bought this AI stock? Let’s find out.
Firing on all cylinders
Palantir has many things I look for in a company. First and foremost, its growing rapidly. In Q3, revenue jumped 30% year on year to $726m, comfortably ahead of a forecast $701m.
For the first time, the firm’s adjusted free cash flow surpassed $1bn on a trailing 12-month basis, pushing its cash and equivalents to $4.6bn.
Meanwhile, net profit surged 100% to $143.5m, representing a very healthy 19.8% net margin.
CEO Alex Carp said: “We absolutely eviscerated this quarter, driven by unrelenting AI demand that won’t slow down.”
This highlights another positive, which is that the software firm is operating at the intersection of AI and big data analytics. Both are huge, complementary growth markets.
Its latest software suite, called Artificial Intelligence Platform (AIP), makes it easy for businesses to use advanced AI tools to solve problems and improve decision-making. Hundreds of businesses and government organisations have already flocked to AIP.
An emerging juggernaut
Palantir is also founder-led, which is something I like to see. Founders have the moral authority and entrepreneurial spirit to take calculated risks that can pay off handsomely. After all, they helped create the company from nothing.
Co-founder Alex Karp has been CEO since Palantir’s inception in 2003. His influence is evident in Palantir’s strategic decisions and distinctive corporate culture.
Consider this quote from Karp in the Q3 shareholder letter: “A juggernaut is emerging. This is the software century, and we intend to take the entire market.”
It’s arguably unlikely we’d hear such an uber-bullish statement from hired management. Co-founders Stephen Cohen and Peter Thiel also serve as president and chairman of the board, respectively.
Of course, founder-led companies don’t guarantee superior returns, but the ones that do succeed wildly also tend to be huge stock market winners (think Nvidia or Salesforce, for example).
Valuation concerns
Finding a high-quality company is only part of the equation though. The other piece of the puzzle is valuation, and this is why I’ve always been hesitant to buy the stock.
Basically, it’s always seemed overvalued to me, and even more so today at $64. The key valuation metrics are eye-wateringly high.
| Metric | |
|---|---|
| Forward price-to-sales (P/S) ratio | 42 |
| Forward price-to-free-cash-flow (P/FCF) ratio | 122 |
| Forward price-to-earnings (P/E) ratio | 140 |
Of course, the stock could go even higher. But the risk is that corporate and government spending on AI unexpectedly slows, which could impact growth and cause a sharp sell-off.
My move
Shopify highlights the risks of buying an overvalued growth stock at the wrong time. Despite nearly tripling in value over two years, it remains 36% below its 2021 peak.
I’m going to keep Palantir on my watchlist for now. It’s one I’d like to own in future. But with the valuation so high, I’d prefer to buy other growth stocks for my portfolio right now.
