Palantir (NASDAQ: PLTR) is one of the hottest stocks in the market right now. In recent months, it seems to have replaced Nvidia as the artificial intelligence (AI) stock to own.
I’ve had this tech stock on my watchlist for a while now, but I’ve never actually bought it for my ISA. Is now the time to pull the trigger?
The real deal
Palantir’s recent results have been really impressive. In my view, they’ve shown that this software company’s the real deal when it comes to AI.
Take the company’s Q4 2024 results, for example. For the period, revenue was up 36% year on year to $828m. Meanwhile, US commercial revenue was up a huge 64% to $214m. Clearly, demand for the company’s AI solutions (which help organisations use their data to get an edge) is sky-high right now.
What has really struck me is the confident tone from management.
“Our business results continue to astound, demonstrating our deepening position at the centre of the AI revolution,” wrote CEO Alex Karp in the Q4 results. “We are still in the earliest stages, the beginning of the first act, of a revolution that will play out over years and decades,” he said in the letter to shareholders.
I like this confidence and the bullish long-term outlook. Overall, this company looks really exciting to me. I genuinely think it could be one of the major beneficiaries of the AI revolution.
I’m struggling with the valuation
However, there are a couple of issues that concern me from an investment perspective right now.
One is the stock’s recent move higher. Over the last year, it’s risen about 350% (which makes Nvidia’s 85% gain look pedestrian). I’m always hesitant to buy a stock after that kind of move because a pullback is often on the horizon.
Another is the valuation. Currently, Palantir has a market-cap of $256bn. Yet this year it’s only forecast to achieve $3.7bn in sales. So the price-to-sales ratio’s 69, which is worryingly high (for reference Nvidia’s on about 17).
As for the price-to-earnings (P/E) ratio, that’s currently about 205. That’s also very high (for Nvidia, read 30).
Now I’m not afraid to invest in high-valuation companies. Currently, I own quite a few high-multiple growth stocks. But for me, Palantir’s multiples are too much of a stretch. I think buying here would be risky.
If revenue growth in the next few quarters was to come in below expectations for some reason (eg fewer new deals signed with government agencies or corporations), this stock could get crushed. It’s worth noting here that the average broker price target at present is $86 – about 24% below the current share price.
My move now
Given the high valuation, I’m going to leave Palantir on my watchlist for now. After a 350% gain over the last 12 months, I’m not going to chase the stock.
If we were to see a sizeable pullback however, I could be interested in taking a small position as a speculative long-term investment. As I said above, I think this company’s the real deal when it comes to AI.
