Why is Palantir Stock so Expensive?

The AI business is great, but this needs to happen before it takes off.

Andrew Willis 3 November, 2023 | 4:38AM
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Key Takeaways for Palantir Stock:

  • The recent rise in popularity of artificial intelligence has propelled narrow-moat Palantir stock too far.
  • We’re in the early innings of market penetration as organizations are still attempting to build their own artificial intelligence solutions – before they realize they need the power of an external software provider.
  • Palantir is shifting its sales strategy to address the market of organizations currently in need of individual modules, rather than large, bespoke and expensive platforms.

 

Andrew Willis: Artificial intelligence leapt to fame with the launch of ChatGPT, and organizations are just about as excited as investors about the commercial opportunities…which makes Palantir PLTR, a leader in the AI services space, a prime target for perhaps a little too much enthusiasm.

Palantir Stock Is Priced Too Far in the Future

Don’t get us wrong, we believe Palantir is well-placed for long-term financial success in both government and commercial markets, but it’s still early days. Organizations may be realizing that their increased digitization could use some AI assistance, but they still need to realize that their in-house solutions are expensive and unscalable over the long run.

To address the customers that might not need a large, bespoke and expensive solution, equity analyst Malik Ahmed Khan says Palantir has shifted to a sales strategy which offers specific modules instead of expensive onboarding. Perhaps investors should be like the clients in this case and wait for the price to come down.

For Morningstar, I’m Andrew Willis.

bulls Palantir Bulls Say

  • Palantir has strong secular tailwinds behind its back as the AI/ML market is expected to grow rapidly due to the exponential increase in data harvested by organizations.
  • With products targeting both commercial and governmental clients, Palantir has a distributed top line with the noncyclical governmental revenue insulating the firm’s top line during lean times.
  • Palantir’s focus on modular sales could potentially lead to substantially more commercial clients, which the firm could subsequently upsell.

bears Palantir Bears Say

  • By not selling to countries/companies that are antithetical to Palantir’s mission and cultural values, the firm has self-restricted its growth opportunities.
  • It will likely be several years before Palantir will achieve GAAP profitability.
  • Palantir’s executive team has made questionable strategic decisions in the past. While past performance isn’t necessarily indicative of future results, we highlight some missteps as a tale of caution for potential investors.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Palantir Technologies Inc Ordinary Shares - Class A21.24 USD-1.76Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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