In the realm of artificial intelligence (AI) software, Palantir Technologies (PLTR 0.19%) sticks out from the rest. Palantir has been in the AI business since its founding in 2003. Originally created to assist governments in processing data to deliver actionable insights, it has since expanded into the public sector, opening up a new business avenue.
With Palantir's multiple decades of expertise, it's becoming a top pick for companies looking to integrate AI models and decision-making into their businesses. Investors are noticing that momentum, piling into the stock as a result.
I agree that Palantir is a top AI pick, and I have three reasons why it's a buy. But I have one reason to avoid the stock, and it may trump the rest.
Reason to buy 1: Palantir's latest product has been a hit
While some of Palantir's AI tools have been around for a while, its latest product, Artificial Intelligence Platform (AIP), has been all the rage. While AIP probably could have used a better name (Palantir's other products sport cooler names like Foundry, Gotham, and Apollo), it gets the point across for what it does.
AIP gives clients the tools they need to integrate AI into everyday workflows. By centralizing all data flows into one location, AIP helps businesses make decisions on the most up-to-date information they have. It also allows large language model integration (the technology behind generative AI), which further arms users to automate and streamline workflows.
Palantir's management consistently used the word "unprecedented" when discussing AIP demand, and this platform will be a major revenue driver for years to come.
Reason to buy 2: Revenue growth is accelerating
Due to the "unprecedented" demand, Palantir's revenue growth has been accelerating. In Q1, revenue grew at a 21% clip to $634 million, the fastest pace since late 2022.
PLTR Revenue (Quarterly YoY Growth) data by YCharts
But Palantir isn't stopping there. In Q2, management expects revenue of $651 million, indicating 22% revenue growth. Growth acceleration is something investors love to see, and its quicker growth rates help justify the stock price.
Still, Palantir isn't just a growth-at-all-costs company.
Reason to buy 3: Palantir's margins continue to improve
Palantir flipped the profitability switch in 2023 when it started producing small profits. Since then, its profit margins have continued to steadily tick up, which can be an incredibly powerful combination when revenue growth is also accelerating.
PLTR Profit Margin (Quarterly) data by YCharts
Palantir's management understands that investors want to see profits eventually, so it is aligning business results with shareholder expectations.
Reason to avoid: Palantir's stock is far from cheap
Palantir checks all the boxes from a business outlook and financial standpoint, but there's still one more factor to consider: its price tag.
Even if everything about a stock is perfect, buying it at the wrong price can be a disaster. For example, Zoom Video Communications was a no-brainer stock during the pandemic. It had unbelievable growth, strong profits, and an incredible outlook, but anyone who bought at elevated levels in late 2020 is down nearly 90% from their initial investment.
Palantir's stock hasn't reached near the hubris as Zoom Video's did, but it's still valued at a hefty premium.
PLTR PS Ratio data by YCharts
At 21 times sales, its price-to-sales (P/S) ratio is nearly equal to its growth rate. This normally doesn't bode well for a stock, as it indicates incredibly high growth expectations.
But is that enough to completely avoid the stock? I don't think so. If investors avoided companies like Amazon or Nvidia because they were too expensive, they'd have missed out on massive winners. However, highly priced stocks can be volatile, so you'll need to set a longer holding period of around five years to make it worth it.
If you can do that, then Palantir could be a fantastic AI investment at these levels.
