Key Points
Palantir Technologies (NASDAQ: PLTR) soared during most of this artificial intelligence (AI) boom, but one thing prompted caution at certain times, and that’s the stock’s valuation. It skyrocketed, reaching a peak of more than 240x forward earnings estimates last year. So, as investors became increasingly worried about the formation of an AI bubble several months ago, Palantir became one of the first AI stocks to suffer.
On top of that, concerns about whether AI demand would remain sustained circulated in the market — and that also weighed on appetite for Palantir stock. As a result, Palantir has declined about 19% since the start of the year.
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It’s important to remember, however, that during all of this, Palantir’s positive earnings story didn’t change: The company continued to report solid demand, and revenue and profit climbed. This wasn’t enough to meaningfully lift the stock — but here’s why the month of May could be a turning point.
Image source: Getty Images.
Palantir’s growth so far
First, let’s start off by getting to know Palantir a bit better. The company has been around for more than 20 years, but it only launched on the stock market in 2020 — and its strong performance only happened as of 2024. Palantir develops software systems that help its customers make better use of their data, and for much of its history, the biggest client for this was the government. Today, governments remain massive customers, but another customer — one with the potential to drive incredible growth over time — has emerged. This is the commercial customer, and revenue from this business is soaring.
Why has this shift taken place in recent times? Because Palantir introduced a system, its Artificial Intelligence Platform (AIP), that incorporates the power of large language models into its data aggregation and analysis. And customers can quickly apply AI to their needs through AIP. As companies scramble to get in on AI, Palantir offers them this easy and powerful solution.
This success has been reflected in Palantir’s earnings reports quarter after quarter. In the latest, for example, the company reported a triple-digit increase in U.S. commercial revenue, a double-digit gain in U.S. government revenue, and it closed a record of more than $4.2 billion in total contract value. The company’s Rule of 40 score of 127% — a score of 40% is considered good — shows immense success when it comes to balancing growth and profit. Finally, increases in the number of U.S. commercial customers demonstrate momentum and room for growth. U.S. commercial customers topped 500 in the quarter, up from just a handful a few years ago.
Palantir’s biggest problem is less of a problem now
Still, this hasn’t been enough to lift Palantir stock out of the doldrums. So, why could May be a turning point? Palantir’s biggest problem — its valuation — is becoming less of a problem. Though the stock isn’t cheap today at about 108x forward earnings estimates, it’s much lower than it was over most of the past year.
PLTR PE Ratio (Forward) data by YCharts
In fact, Wall Street’s average price estimate calls for the stock to climb 30% over the coming 12 months from today’s level. So Wall Street, in general, no longer is warning about the valuation risk.
It’s also important to note that several companies across the AI story — from Taiwan Semiconductor Manufacturing to Micron Technology and Intel — have spoken of strong demand for AI in recent weeks. All of this is making investors more optimistic about the long-term AI growth story, and we can see this through recovery in certain major AI stocks such as Nvidia. The AI giant saw its stock slide 6% in the first quarter but has climbed in recent weeks.
Now that Palantir’s valuation has dropped, evidence is piling up that the AI growth story remains intact, and other AI stocks are rebounding, Palantir stock could reach a turning point in May. And if its earnings report on May 4 is as bright as Palantir’s previous ones, it could kick-start the positive momentum.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel, Micron Technology, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
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