Companies involved in artificial intelligence (AI) have seen their stock valuations skyrocket over the past year. Investors are bullish on companies that can leverage next-generation technologies to their advantage and unlock future growth opportunities.
A company that invested in AI was Palantir Technologies (NYSE:PLTR). Last year, the data analytics company unveiled its AI platform, AIP, which management said was a big hit with customers. But as promising as the company’s prospects appear to be, I wouldn’t jump on the Palantir bandwagon just yet.
Management has set the bar high
One thing that makes me wary is when management sets expectations that may be a little high. This can make it extremely difficult for the company to beat expectations and it also means the stock is likely trading at a significant premium as investors price in whatever future growth management is talking about that hasn’t happened. yet materialized. And trading at more than 60 times its estimated future incomeclearly this is the case for Palantir.
At Palantir most recent earnings call Among analysts, CEO Alex Karp helped publicize the company by saying, “I don’t believe the U.S. commercial market has any competition.” Ryan Taylor, the company’s chief revenue officer, also said that conversions following the company’s “boot camps” – workshops where the company helps potential customers understand how to use its products – were often rapid and significant. “We’re seeing clients, you know, shortly after training camp, signing seven-figure deals,” he said.
The problem is that with such bold claims, investors expect strong results. And even though Palantir has seen growth, its growth rate has remained relatively stable.
Palantir’s growth is strong, but hasn’t really taken off
In the first three months of 2024, Palantir’s revenue exceeded $634 million and grew 21% year-over-year. That’s a good growth rate, but considering how the company has performed over the past few quarters, it’s not a huge improvement.
The results don’t appear to match the rosy rhetoric, with management claiming there is no competition in some markets and that it is able to quickly convert customers into large purchases.
The company hosted more than 660 boot camps last quarter, and investors should likely expect much more growth if these conversions do indeed happen quickly. Even though the numbers don’t reflect immediately on the business, that’s what forecasts are for, to reflect the company’s optimism about the future.
But the company only modestly raised its full-year guidance in May. Palantir now projects revenue for 2024 to be in a range of $2.677 billion to $2.689 billion. Three months earlier, the forecast range was $2.652 billion to $2.668 billion. Without three decimal places, it would be difficult to see any increase in guidance.
Although Palantir claims it is growing and its customers are seeing value in AIP and converting, the growth just doesn’t seem to be evident in the results or direction. And that makes me worry that there’s a little too much hype behind the tech title and not enough substance to back it all up.
Palantir could be a good investment, but it comes with a lot of risk
Over the past three months, Palantir’s stock has fallen 11%, as recent quarterly results have done little to entice investors to pay more for what is already an incredibly expensive investment. Between the high earnings multiple and the results that don’t seem to match what management is saying, I fear further sell-offs are imminent for Palantir stock.
It still has plenty of long-term potential to be a good buy, but investors might be better off waiting a few more quarters to see if there is a dramatic improvement in Palantir’s growth rate before making a decision regarding the title.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
1 Big Reason Why I Wouldn’t Buy Palantir Technologies Stock Right Now was originally published by The Motley Fool
