Is Palantir a good artificial intelligence (AI) stock to buy now?

After growing by over 100% in 2024, Palantir Technologies (PLTR 1.00%) is finally getting Wall Street’s attention. The data analytics company has benefited from a surge in excitement around its new generative artificial intelligence (AI) tools. And it will join the benchmark S&P 500 index this month, demonstrating its growing relevance in the market.

Let’s dig deeper to see if it’s a good idea for new investors to bet on this booming stock right now.

Is AI software ready for prime time?

Since the launch of OpenAI’s ChatGPT in late 2022, AI-related generative actions have generated billions, if not trillions, of in shareholder value. Howeveryetmost of the operating momentum was confined to hardware giants like Nvidia, which saw its second-quarter revenue more than double by selling graphics processing units (GPU) required to run and train these advanced algorithms.

While the software side of the AI ​​industry has enjoyed relatively less success, Palantir could help change that dynamic by introducing the technology to discerning military customers and intelligence agencies that need to stay one step ahead of their adversaries.

The company created its Artificial Intelligence Platform (AIP) designed to synergize its legacy data mining tools with AI. large language patterns (LLM) to provide real-time intelligence in high-stakes combat scenarios for the US and its allies. Palantir also makes a case for private sector companies through its Foundry data analytics platform (its government-focused platform is called Gotham).

Business momentum looks good

The rise in Palantir’s stock price corresponds with healthy business momentum. In the second quarter, total revenues increased by 27% year after year to USD 678 million. However, while the company is best known for its high-profile government contracts, work in the private sector is becoming an increasingly important part of its business model.

Palantir’s second-quarter private sector customer base grew 83% to $295 million, and segment revenue increased 55% to $159 million (about 23% of total sales). While this remains a relatively small part of Palantir’s business, its growth will be welcome news for investors.

Unlike government contracts, which can be stuck and inconsistent, commercial software-as-a-service revenue (SaaS). is designed to be stable and recurrent. This feature will make Palantir easier to predict and appreciate. It also provides welcome diversification and suggests the company is good enough to compete in a very crowded field.

Palantir’s bottom line also remains buoyant, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rising 39% to $261.6 million. However, that move adds back a whopping $141.8 million in stock-based compensation.

Paying employees with shares can help young companies motivate staff and save cash reserves, but that comes at the cost of diluting current shareholders’ claims on future earnings. So investors should weigh the trade-offs.

Image source: Getty Images.

Palantir is not without its challenges

Excessive stock-based compensation isn’t Palantir’s only problem. As mentioned earlier, the company’s push into private sector SaaS offerings places it in a crowded industry where it will compete with other data analytics software giants such as Amazon and Microsoft.

While Palantir has a economic moat in government contracts, because of its longstanding relationships and resistance to outside pressures, it is unclear how well these advantages will translate into private sector activity.

Palantir’s megacap competitors likely have more money to spend on research and development (R&D) and customer acquisition. And it boasts stakes in top AI companies like OpenAI (a Microsoft partner) and Anthropic (an Amazon partner).

Given these challenges, Palantir’s 88 price-to-earnings (P/E) multiple shows away too optimistic And I don’t see the company growing at this rich valuation whenever soon.