PLTR Alert: Sell Palantir Stock as AI Hype Pushes Valuations Higher

Palantir (NYSE:PLTR) shares have risen sharply this year thanks to significantly increased commercial revenue, offsetting the company’s heavy reliance on government contracts.

Palantir, often under scrutiny for its ties to the defense sector, is now quietly building a reputation in the commercial space. A key driver of this expansion is Palantir’s AI platform, which is increasingly being used by companies. Palantir is also eligible for inclusion in the S&P500 With the company reporting four consecutive quarters of GAAP earnings, stock performance has improved even further.

In addition, there is a certain segment of investors who value Palantir highly because of its agreements with the US Department of Defense. This type of consistent, recurring cash flow is highly sought after.

But given its 63% year-to-date gain, Palantir stock is overvalued by most major metrics, making it an ideal time to divest from some of your holdings and invest in companies whose upside potential is not being realized in the current market.

Palantir stock has seen several ups and downs this year. The stock is struggling at $30; it is falling back as it approaches that level; resistance is at $20. Selling Palantir stock at $27.18 makes sense.

Impressive growth and strategic alliances

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Palantir shares recorded double-digit growth in the first half of the year. But what is crucial is why.

Palantir Gotham, Apollo and Foundry have been using big data for years. However, Palantir’s most important offering is its AI platform. AIP helps companies develop AI models with over 1,300 bootcamps worldwide.

Launched in April, the Model Catalog allows users to browse Palantir models in AIP. This technology enables companies to easily integrate and apply AI models for various purposes.

In July, AIP Logic Evaluations delivered reliable, high-quality AI process results. This tool enables users to properly test and certify AI models for production use.

In addition, Palantir and Voyager Space are working together to improve military research, communications, and space and defense intelligence. The partnership will manage International Space Station payloads and create a “customer hub” for urgent requests using Palantir’s Foundry and AI technology.

Carahsoft and Palantir deliver mission-critical software to the Canadian government. By collaborating, Canadian government organizations can better leverage Palantir’s AI-powered solutions for financial crime prevention and healthcare.

oracle (NYSE:ORCL) and Palantir are also collaborating. Through this partnership, Palantir’s AI and data analytics capabilities and Oracle’s cloud infrastructure will accelerate the adoption of AI across all industries.

These activities are keeping Palantir expanding. Palantir’s commercial contracts brought in $299 million in the first quarter of 2024, up 27% year over year. Palantir generated $150 million in commercial revenue in the U.S., up 40% year over year.

Government contracts increase revenue

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Palantir was recently awarded a $480 million contract by the Pentagon’s Chief Digital and Artificial Intelligence Office to develop and integrate artificial intelligence across numerous DoD platforms. This includes an initial $153 million purchase for the Joint Chiefs of Staff and the implementation of the Maven Smart System at certain combatant commands.

In addition, Palantir was awarded a $178.4 million contract to develop the next-generation targeting system, Tactical Intelligence Targeting Access Node. This system connects Army units with high-altitude and space sensors to provide comprehensive targeting data.

Palantir has secured multiple contracts with the U.S. Air Force totaling over $100 million to provide data-as-a-service platforms. These systems will support mission-critical activities at the National Space Defense Center and the Combined Space Activities Center, among others.

In total, Palantir earned $335 million from government contracts in the first quarter of 2024, up 16% year over year. Recent notable government contracts include a $480 million Department of Defense contract for the Maven Smart System prototype, a $178 million contract for the Army’s Tactical Intelligence Targeting Access Node, and several smaller contracts totaling about $169 million in recent months.

Palantir shares face skepticism due to high valuation

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Several well-known experts have expressed pessimism about Palantir shares. Brian White of Monness, Crespi & Hardt is concerned about what he sees as the “unprecedented hype cycle in the generative AI space” and the stock’s high valuation multiples and recently downgraded Palantir shares to “strong sell.”

Broader market questions also revolve around Palantir’s valuation and its dependence on government contracts. Although the expansion of its commercial business and artificial intelligence projects are promising, doubts remain about the company’s long-term profitability and market positioning.

With a price-earnings ratio of 226.5, Palantir stock is underperforming 95% of the 1,531 software companies examined. Execution is not the problem for Palantir. However, as White says, Palantir stock is trading at an “incredibly high valuation.”

White’s analysis also reflects the general sentiment on Palantir stock. The stock has a consensus rating of Hold and the average price target is $22.42, representing a 17.5% downside risk from the current price of $27.18.

Under the circumstances, it is worth selling some of your Palantir shares and investing in other growth areas.

At the time of publication, the editor in charge did not hold any positions (either directly or indirectly) in the securities mentioned in this article.

At the time of publication, Faizan Farooque had no position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing guidelines.