It’s not the sexiest of this year’s initial public offering (IPO) crop, but Palantir (NYSE:PLTR) is adding to the chatter that 2020 is looking a lot like the 2000 dot com bubble. In fact, up almost 187% year-to-date (YTD) and trading at a staggering 44.76 times sales, Palantir stock does little to reject the bubble thesis.
For the time being, though, saying that Palantir is in imminent danger of bursting may be hyperbole. However, there’s no denying that the stock is sensitive to headlines — perhaps too much so. For example, that was on display on Dec. 7, when the shares surged over 21% on the news of a $44.4 million three-year contract with the U.S. Food and Drug Administration (FDA).
Think about that for a moment. A 21% intraday rally on news of a $44.4 million contract that isn’t new business but rather the extension of an existing relationship. Although it’s good that this is “Palantir’s largest partnership with the FDA to date,” such a drastic pop is probably too much, too fast.
Palantir Stock Is Buyable on a Deeper Retreat
Now, I’m not maligning Palantir, but it is important for investors considering a position in the stock to be near-term cautious. The aforementioned FDA contract rally confirms that. But there are some pluses here that make Palantir stock buyable on the pullbacks.
For one, the company provides data analytics, software and technology used by governments for defense and intelligence purposes, among other things. However, that business model may conjure up images of Hollywood movies and real-life political implications. If anything, that should underscore why it’s critical for the company to source new clients that are more FDA-like and less CIA.
On top of that, a company like Palantir is largely dependent on those government contracts. With an administration change coming to the White House, some investors are concerned about how Joe Biden will view controversial companies like PLTR. Fortunately, though, the firm is proving to be adept at navigating the changing governmental landscape, indicating that it’s not as politically sensitive as originally believed.
Another reason you might want to nibble at Palantir stock on the dips is its technology-centric business model. Why? It revolves around a pair of disruptive themes: artificial intelligence (AI) and big data. Parsing reams of data to make real-time intelligence decisions is a burden for humans, but one eased significantly by the technology purveyed by PLTR. So, the company has significant relevancy.
In fact, AI presents Palantir with multiple avenues for growth. For instance, governments are forecast to up AI and data spending for defense and intelligence purposes over the next several years. There are also non-defense applications that the company can capitalize on, too. The National Security Commission on Artificial Intelligence actually recently recommended that the U.S. government double its non-defense AI expenditures.
Solid Outlook
For the current quarter, Palantir expects revenue growth of 31% and at least 30% growth next year. That’s an encouraging set of statistics.
However, the one percentage investors would like to see decrease is the 93% of sales derived from existing customers. If anything, that only highlights PLTR’s need for new business from new clients.
But that should come with time because of the data integration market. The company is becoming a leader in that nascent space and offers myriad efficiencies for both public and private sector customers. So, if it can capitalize on this market, there’s a long runway for growth with Palantir stock.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.