Palantir Technologies has had an exceptional year, capturing the attention of investors with a stock price increase of over 100% year to date. The company, known for its work in defense contracting, software, and artificial intelligence (AI), now boasts a market capitalization of $80 billion. With its recent announcement of joining the S&P 500, the excitement around Palantir’s stock has only intensified. But does this surge make it a smart investment?
While the company’s recent performance looks strong, there are several factors to consider before deciding if Palantir is a buy.
A Strong Year of Growth
Palantir’s business growth has been substantial in 2024. Total revenue grew by 27% year over year, reaching $678 million in the latest quarter. U.S. commercial revenue surged even more, jumping 55%, as more businesses began adopting its AI-driven intelligence software solutions. The company’s total customer count now sits at 593 and continues to rise every quarter, giving Palantir a steady stream of new revenue opportunities.
As Palantir expands its presence in commercial sectors, it is also generating healthy free cash flow. Over the past year, free cash flow totaled $696 million, a significant improvement from the losses it posted just a few years ago. Operating income has also seen positive momentum, rising to $292 million in the last 12 months, with an operating margin of 12%.
These impressive financial results have fueled optimism around Palantir’s future, especially given the growing importance of AI in the commercial landscape.
The Buzz Around S&P 500 Inclusion
Palantir’s upcoming inclusion in the S&P 500 index is another key event that has boosted investor enthusiasm. Following the announcement, Palantir’s stock jumped more than 10%, reflecting the excitement around its addition to one of the most important stock indices.
However, the surge in stock price due to index inclusion is largely speculative. Many investors believe that being added to a major index automatically raises a company’s value due to increased demand from index-focused funds. While this can cause short-term price movements, it doesn’t affect the underlying business fundamentals. In Palantir’s case, the stock price spike driven by index inclusion doesn’t necessarily reflect its long-term value.
Palantir’s Business Potential
Beyond the buzz surrounding the S&P 500, Palantir’s business performance remains a crucial factor to examine. The company has shown it can grow its customer base and revenue while increasing profitability. Once Palantir secures a customer, its software and AI tools typically drive continued revenue growth with that client. This trend suggests that Palantir’s revenue growth should remain strong as its commercial footprint expands.
However, it’s important to look at the broader picture. Despite its solid business performance, Palantir’s stock is trading at an extremely high valuation. With a price-to-sales (P/S) ratio of 34, Palantir is priced as if it will continue growing at double-digit rates for years to come, while also achieving best-in-class profit margins. Even with aggressive revenue growth projections of 30% annually for the next five years, Palantir’s valuation remains steep. The company would need to hit $9.2 billion in sales and a 30% operating margin to justify its current valuation — a challenging goal, even for a fast-growing tech company.
Is the Stock Overpriced?
At its current market capitalization of $80 billion, Palantir is valued like one of the largest software companies in the world. But with its shares outstanding continuing to rise due to stock-based compensation packages, this dilution presents a potential headwind for future returns.
Additionally, even under optimistic growth scenarios, the company’s price-to-earnings (P/E) ratio could be around 26.6 five years from now — which aligns with the broader market average but leaves little room for error if the company fails to meet its lofty expectations.
Proceed with Caution
While Palantir’s business performance is undeniably strong, its stock price may be too high for most investors looking for value. The excitement surrounding its inclusion in the S&P 500, though noteworthy, should not be mistaken for a signal to buy.
Investors need to assess whether the company’s current valuation is sustainable and whether its growth trajectory can meet the sky-high expectations that the market has set. Proceeding with caution is wise, especially after a 100% increase in stock price in 2024.
