With shares up 58% over the last 12 months, Palantir Technologies (NYSE: PLTR) has been a solid performer in the competitive artificial intelligence (AI) landscape. While the company isn’t involved in the highly lucrative hardware side of the opportunity, its software focus could help transform military contracting and law enforcement. Let’s explore how the company’s near-term decisions could impact its long-term potential.
A unique spin on AI technology
According to Bloomberg Intelligence, the generative AI industry could grow at a compound annual growth rate (CAGR) of 42% to $1.3 trillion by 2032. Initially, most of this expansion will benefit hardware companies like Nvidia and Advanced Micro Devices (AMD), which make the computer chips needed to run and train these advanced algorithms.
However, over time, the market is expected to shift toward software companies like Palantir that use AI to solve real-world problems. Law enforcement and the defense industry might be willing to pay big bucks for solutions that keep them one step ahead of their adversaries.
For this niche market, Palantir’s key asset might be trust. The company has a long track record of working with high-level government clients for demanding and highly sensitive missions. Its software helped the Department of Defense track down Osama Bin Laden over a decade ago. And now, it’s working with the governments of Ukraine and Israel for combat-related missions in their respective wars.
Palantir’s clients often place it under political and media scrutiny. A 2020 opinion piece in The Guardian called its data-analytics tools “unethical,” calling the company the “big tobacco” of the tech world for its role in helping the Trump administration with deportations.
But technology is just a tool that’s only as good as the people using it. And as a government contractor, Palantir probably won’t face regulatory scrutiny related to its software. That pressure would more likely be directed at the government itself. And there’s little evidence that bad press is hurting Palantir’s ability to attract private-sector clients.
In the first quarter, Palantir’s commercial sales jumped 27% year over year to $299 million, outpacing government sales (up 16% to $335 million). Instead of scaring away private-sector clients, Palantir’s high-profile government work may be convincing them of the robustness and security of its software solutions. The company’s willingness to stand up to media pressure could also boost its competitive moat against competition.
In May, Palantir won a $480 million contract for the U.S Army’s Maven Smart System, an AI-based targeting system previously abandoned by Alphabet‘s Google in 2018 amid high public and internal backlash. Palantir has proven much more resilient against this sort of pressure.
Where will Palantir stock be in one year?
Over the long term, Palantir looks like a big winner as AI technology becomes increasingly important in law enforcement and the defense industry. But in the near term, investors should pay close attention to the stock’s valuation, which is much too high for comfort.
To say Palantir is priced for perfection feels like an understatement. With a forward price to earnings (P/E) multiple of 86, shares dwarf the broader Nasdaq multiple of 29. Investors may want to wait for a correction before taking a position in the company.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Where Will Palantir Stock Be in 1 Year? was originally published by The Motley Fool
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