Palantir (NYSE:PLTR) is a standout in this year’s AI-driven rally, gaining nearly 150% on a year-to-date basis thanks to strong earnings and elevated expectations.
The launch of ChatGPT in November 2022 boosted AI stocks, leading many companies to discuss their AI efforts on earnings calls.
Palantir stock also saw a surge in its stock price after exceeding Q1 2023 earnings expectations, predicting profitability for the year. Cathie Wood’s Ark Invest also increased its stake, further boosting investor confidence in the company.
Palantir’s stock price surged 132% from its Q1 report to its Q2 earnings release in August, causing its price-to-sales ratio to exceed 21-times. The rapid valuation increase raises questions about whether the stock is now overvalued.
Palantir Has More Headwinds to Endure
Palantir’s Q2 earnings didn’t impress, and concerns arise from its very high price-sales ratio of 19-times, when its Q2 revenue only increased by 13% year-over-year. This suggests investors are paying a premium for expected growth, but the company hasn’t met those expectations.
Palantir’s sales model offers free trials, aiming to showcase value and convert users into paying customers. Yet, scaling this globally poses challenges and execution risks, demanding substantial investments.
CEO Alex Karp’s belief that Palantir’s software could sell itself without a sales team may have worked in government but hindered commercial customer acquisition.
While the U.S. commercial customer count has risen, unconventional sales practices raise investor concerns.
Palantir’s ill-conceived acquisition strategy in 2021, primarily involving SPACs, led to cash flow problems, regulatory issues, and lawsuits. It resulted in substantial losses, eroding trust in the management team.
Palantir’s market position and reputation may draw investors, but concerns about regulatory changes in the AI industry could create uncertainty.
Ongoing AI advancements and potential regulations make the future of AI software developers unpredictable, with significant potential impacts on companies, as noted by CEO Richard Gardner of Modulus.
What Now
A company’s technology might be impressive, but it doesn’t necessarily make it a good stock if its price is high compared to its growth potential or if it carries substantial risks.
Even after its post-Q2 2023 earnings drop, Palantir remains relatively costly given its current growth and associated risks.
Palantir’s stock has surged 143% in 2023 but remains 60% below its early 2021 highs, indicating continued volatility. Investors may want to think about selling, as management decisions could be hindering the company’s potential.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.