Palantir ( NYSE:PLTR ) shares have risen significantly this year as commercial revenue has grown significantly, offsetting the company’s heavy reliance on government contracts.
Often criticized for its ties to the defense industry, Palantir is now quietly building quite a reputation in the commercial sector. One of the main drivers of this expansion is Palantir’s AI platform, which companies are increasingly using. With four consecutive quarters of GAAP revenue growth, Palantir has also qualified for inclusion in the S&P 500, further improving its stock performance.
Additionally, some investors value Palantir because of its contracts with the Department of Defense, which provides a steady, recurring cash flow that’s highly desirable.
But with Palantir stock overvalued by most major metrics, given its 63% gain since the start of the year, now would be an ideal time to liquidate some of your holdings and invest in a company with upside potential that’s currently unrealized in the market.
Palantir stock has seen some highs and lows this year. The stock struggled at $30 and has fallen as it approached that level. Resistance is at $20. Selling Palantir shares at $27.18 makes sense.
Impressive growth and strategic alliances
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Palantir shares have seen double-digit gains in the first half of the year, but it’s important to know why.
Palantir Gotham, Apollo, and Foundry have been leveraging big data for years. Still, Palantir’s main product is its AI platform. AIP helps organizations grow their AI models through more than 1,300 bootcamps around the world.
The model catalog, introduced in April, allows users to browse Palantir models in AIP, and companies can use the technology to easily integrate and apply AI models for a variety of purposes.
In July, AIP Logic Evaluations provided reliable, high-quality AI process results, a tool that allows users to properly test and certify their AI models for production use.
Additionally, Palantir and Voyager Space are collaborating to enhance military research, communications, and space defense intelligence. The partnership is building a “customer hub” to manage payloads for the International Space Station and respond to rapid requests using Palantir’s foundry and AI technology.
Carahsoft and Palantir provide mission-critical software to the Government of Canada. By working together, Canadian government agencies will be able to better leverage Palantir’s AI-powered financial crime prevention and healthcare delivery solutions.
Oracle (NYSE:ORCL) and Palantir are also working together. Through this partnership, Palantir’s AI and data analytics skills and Oracle’s cloud infrastructure will accelerate AI adoption across various sectors.
These activities continue to help Palantir expand. Palantir’s commercial contracts generated revenue of $299 million in the first quarter of 2024, up 27% year over year. Palantir increased its U.S. commercial revenue by $150 million, up 40% year over year.
Increased revenue from government contracts
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Palantir was recently awarded a $480 million contract by the Department of Defense’s Chief Digital and Artificial Intelligence Office to develop and incorporate artificial intelligence technology into many of the Department of Defense’s platforms, including an initial purchase of $153 million for the Joint Chiefs of Staff and implementation of the Maven Smart System in certain combatant commands.
Additionally, Palantir was awarded a $178.4 million contract to develop the Tactical Intelligence Targeting Access Node, a next-generation targeting system that will link Army forces with high-altitude and space-based sensors to provide in-depth targeting data.
Palantir has been awarded multiple contracts totaling more than $100 million from the U.S. Air Force to provide its Data-as-a-Service platform. These systems will support mission-critical operations at facilities such as the National Space Defense Center and the Joint Space Operations Center.
Palantir is expected to win a total of $335 million from government contracts in the first quarter of 2024, representing a 16% increase over the prior year. Recent notable government contracts include a $480 million contract for the Department of Defense’s Maven Smart System prototype, a $178 million contract for the Army’s Tactical Information Targeting Access Node, and several smaller contracts totaling approximately $169 million in recent months.
Palantir shares face skepticism amid high valuation
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Many prominent experts have voiced pessimistic comments about Palantir stock, with Mones, Crespi & Hart’s Brian White recently downgrading the stock to “strong sell” due to concerns about the “unprecedented generative AI hype cycle” and the company’s high valuation multiple.
More broadly, market questions also extend to Palantir’s valuation and reliance on government contracts: While the company’s commercial expansion and artificial intelligence projects show promise, questions remain about its long-term profitability and market positioning.
Palantir’s price-to-earnings ratio of 226.5 is worse than 95% of the 1,531 software companies surveyed. Execution isn’t an issue for Palantir, but as White says, Palantir’s stock is trading at a “stupidly excessive valuation.”
White’s analysis is in line with the consensus opinion on Palantir stock, which has a consensus rating of “Hold” and an average price target of $22.42, suggesting a 17.5% downside from the current price of $27.18.
As things stand, it may be worth selling some of your Palantir shares and investing in other growth areas.
On the date of publication, the editor in charge did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As of the date of publication, Faizan Farooq did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com’s Publishing Guidelines.
Faizan Farooque is a contributor to InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was previously a data journalist for S&P Global Market Intelligence. His passion is helping the average investor make more informed decisions about their portfolio.
