PLTR Stock: Will AI Growth Push the Palantir Share Price Higher?

The Palantir share price has soared in 2024 as the AI revolution has driven demand for its software solutions. Nevertheless, the growth of its US commercial business is showing some signs of weakness, which could potentially weigh on PLTR stock.

Palantir [PLTR] is a Colorado-headquartered data analytics software company set up by PayPal [PYPL] Co-founder Peter Thiel. It is sometimes referred to as a “spy tech” company because of its history of links with intelligence agencies and military organizations, including the UK’s Ministry of Defense and the CIA.

This stock spotlight will discuss Palantir’s recent ascension into the S&P 500, as well as how it is using artificial intelligence (AI) to enhance efficiency in the oil and gas industry. It will also highlight how the company’s reliance on government contracts could be a headwind as its revenue from commercial contracts slows.

A “Momentous Occasion” 

In the S&P 500’s quarterly rebalancing at the start of the month, Palantir was added to the index, alongside Dell [DELL] and Erie Indemnity [ERIE], replacing American Airlines [AAL], Etsy [ETSY] and Bio-Rad Laboratories [BIO].
 
To be added to the S&P 500, a company needs to have delivered a profit in the most recent quarter as well as to have reported a cumulative profit over the past four quarters.
 
In a video message to Palantir investors, CEO Alex Karp described the news as “an enormous, momentous occasion… It’s enormous because the way in which we built the company should have precluded membership to the most elite institution in economic life.”

PLTR Stock Hits 52-Week High

The Palantir share price jumped in reaction to the S&P 500 news, hitting an all-time of $36.92 on September 16, up 169.88% from its 52-week low of $13.68, set on September 21 last year.
 
PLTR stock is up 16.30% in the past month through September 16, while it has gained 111.47% since the start of 2024 and 136.86% in the past year.

Palantir’s US Government Annual Revenue Surpasses $1bn

On the back of a surge in demand for AI, Palantir raised its full-year revenue guidance for the second time this year when it delivered its Q2 results in August. It now expects revenue to be in a range of $2.74bn–2.75bn, up from a range of $2.68bn–2.69bn.
 
Revenue from government contracts was up 23% year-over-year to $371m in the three months to the end of June, taking a 54% share of total revenue, and up 24% in the US to $278m. Commercial revenue was up 33% to $307m and up 55% to $159m in the US.
 
“For the first time in our company’s history, the trailing 12-month revenue in our US government business — including defense and intelligence agencies — surpassed $1bn”, Karp wrote in his letter to shareholders.
 
He also suggested on the Q1 earnings call that Palantir has no competition in the US in either the commercial or government markets. Notwithstanding this, let’s compare Palantir to Datadog [DDOG] and Snowflake [SNOW], two other AI software firms that organize and streamline organizations’ data.

Source: Yahoo Finance

The software and AI themes are known for their pricey valuations, so it is no surprise that the three stocks have a P/S ratio of more than 10. However, while Palantir’s projected revenue growth is respectable, it arguably does not justify a P/S of above 30.

PLTR Stock: The Investment Case

The Bull Case for Palantir

As more industries look to integrate AI capabilities into their operations, Palantir’s software solutions will continue to be in high demand.
 
Last week, the company extended a partnership with BP [BP], which has been running since 2014. The new agreement will see the oil and gas giant use large language models to analyze data from its drilling sites in real-time.
 
Matthew Babin, Head of Energy and Natural Resources at Palantir, said in a statement that its AI platform, known as AIP, “offers the opportunity to help accelerate human decision-making on top of the robust digital twin and deep operational workflows already in place”.
 
Following the S&P 500 news, Wedbush’s Dan Ives wrote in a note that the company is in the early innings of “a multi-year cycle… to continue generating significant deal flow on the back of AIP”.

The Bear Case for Palantir

Deals like the BP one are arguably going to be key for Palantir’s future growth — assuming that the commercial business can grow its share of total revenue.
 
The company’s reliance on government contracts is a potential risk. If US economic worries lead to a slowdown in software spending, then this could impact income and earnings.
 
Investors will also need to pay attention to how well its US commercial business performs in the near term. US commercial revenue in Q2 2024 was only up 6% sequentially, slowing from a rate of 14% in Q1 and 12% in Q4 2023. The number of US commercial customers grew 83% year-over-year to 295, but is up 13% sequentially compared to 19% in Q1 and 22% in Q4 2023. The total number of commercial customers, including the US, rose 9% to 467 in Q2.

Conclusion

There is plenty to be excited about with Palantir. The company’s outlook for the rest of the fiscal year looks promising and demand for its AIP should continue to grow. But PLTR stock currently looks overvalued and it is important to be mindful of the risks, especially in relation to its US commercial customer base.

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