Palantir Technologies (NASDAQ: PLTR) stock has been one of the biggest winners of the artificial intelligence (AI) revolution so far. It’s up by a whopping 1,237% since the start of 2023!
While not as dramatic, the 12-month return of 273% is nothing to be sniffed at. It means an investor who put £10,000 into the AI growth stock one year ago would now have £37,300! Nice.
Mind you, our investor would have been sitting on about £54,000 in mid-February when the Palantir share price peaked at $124. It’s currently at $85, meaning it has plunged 31% in six weeks.
As a reminder, Palantir is a software company that helps governments and businesses make sense of massive, complex datasets. Its newest offering, Artificial Intelligence Platform (AIP), enables customers to integrate generative AI into their operations.
AIP is fuelling accelerating revenue growth, which has sent the stock soaring. But should I invest after this 31% dip?
AI-fuelled growth
It’s impossible not to be impressed by the company’s growth. In the fourth quarter, revenue in its US business surged 52% year on year to $558m, driving total revenue 36% higher to $828m.
Full-year revenue grew 29% to $2.87bn, supported by a 54% jump in US commercial revenue. This is important because Palantir started out in 2003 helping intelligence agencies analyse data to track threats after 9/11. Then it moved into other areas of government, before finally pushing into the private sector with its Foundry platform.
The commercial opportunity, especially in AI, appears massive and Palantir is laser-focused on capturing it.
The world is in the midst of a US-driven AI revolution that is reshaping industries and economies, and we are at the centre of it…This is the software century, and we intend to take the entire market.
Palantir CEO Alex Karp
The company’s AI boot camps are helping prospective customers understand how the technology can help improve their business. The firm moves fast from concept to real-world AI use cases, tailored to each organisation’s data and needs. This helped drive its customer count 43% higher in the fourth quarter!
Meanwhile, Palantir’s adjusted free cash flow reached $1.25bn last year, representing a robust 44% margin.
Risk/reward dynamic
Clearly then, this top-notch software company is growing like wildfire. The sticking point for me here though is valuation. Right now, the stock’s price-to-sales (P/S) ratio is a sky-high 73.
This is the type of multiple I’d expect to see from a small growth firm, which Palantir isn’t, or one growing revenue by triple digits. However, Palantir is expected to grow its top line by around 31% this year then 27% in 2026. Very strong, but not spectacular when considering the hefty valuation.
Looking at 2026 forecasts, Palantir is trading at a forward P/S ratio of about 42. And the forward price-to-earnings multiple is 108. This means the stock is priced for absolute perfection, meaning there’s significant valuation risk if the firm’s growth slows more than expected.
Also, it looks likely there will be US defence budget cuts, which is creating uncertainty. Then again, it’s possible Palantir’s AIP could benefit due to the efficiency it helps unlock.
If the stock keeps falling, I may reconsider. But I think there are safer AI/growth stocks for my portfolio right now.
