Thinking of Buying Palantir Stock? Here Are 2 Red Flags to Watch.

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Palantir Technologies, represented by the ticker symbol PLTR, is generating significant buzz as one of the key artificial intelligence (AI) stocks currently available. Their software is instrumental in assisting governments and businesses in transforming intricate data into valuable insights, and they have recently reinforced their AI approach with the debut of their Artificial Intelligence Platform (AIP).

Appearing well-established with a robust brand identity and an edge in the market, the company appears primed to capitalize on the expanding AI trend. Nevertheless, it’s crucial for investors to scrutinize the underlying financial aspects closely, as potential issues could cap Palantir’s growth potential if not rectified in the long term.

Red flag No. 1: Revenue concentration is still a major risk

Palantir’s foundation stems from government projects, a fact that still significantly influences its current operations. By December 31, 2024, approximately 55% of their total earnings are expected to come from government contracts, chiefly with the United States Department of Defense and the intelligence community.

These transactions are substantial, adhesive, and essential, yet they carry risks as well. For instance, government expenditure tends to follow a cycle and is susceptible to the fluctuations of political climate. A shift in focus or financial limitations might cause postponement of contract renewals or budget reductions, which isn’t just hypothetical – it has occurred before and may recur in the future.

As an ardent follower, I can’t help but emphasize the intriguing aspect of Palantir’s potential market expansion. Specifically, it seems that the total addressable market (TAM) catering to the public sector has a defined limit. To break it down, a select few allied nations, predominantly in North America and Europe, are the primary candidates who can effectively utilize its software for national security purposes. This inherently sets a ceiling on the company’s growth trajectory in terms of government revenue, as the market is not vastly diversified.

To elaborate further, this situation becomes more limited with the focus on a handful of customers. In 2024, it’s worth noting that the top 20 customers for Palantir generated an average revenue of $64.6 million each, amassing a total of $1.3 billion, which equates to a staggering 45% of their overall $2.9 billion revenue for that year. Given this significant reliance on a small number of major clients, the potential loss of one or two key partners could significantly affect their growth and financial success.

Palantir is striving to transform its commercial operations by expanding them significantly. For example, in Q1 2025, the U.S. commercial sector saw a 71% increase in revenue compared to the previous year, surpassing the 45% growth rate of U.S. government revenues. The quick integration of AI and the introduction of AIP may aid in expanding commercial use of the company and gradually dispersing its reliance on a single revenue source over time.

Yet, before this transition is completely accomplished, the issue of concentrated revenue remains a significant risk for long-term investors.

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Red flag No. 2: AI narrative is running ahead of fundamentals

The AIP platform from Palantir plays a crucial role in stirring investor enthusiasm. Essentially, it offers businesses the opportunity to integrate intelligent software agents, specifically trained on their exclusive data, within a safe, regulated setting. This unique proposition resonates with how corporations may be expected to embrace AI technology.

To date, initial signs suggest that the tech company is progressing positively. They experienced a significant 43% increase in their customer base, now standing at 711. Additionally, they boosted the total value of pending business deals by 47%, amounting to $3.1 billion. This growth was largely driven by an impressive $803 million deal sealed in the U.S. commercial contract market during Q4 of 2024.

However, it’s important to note a discrepancy: Although there are valid arguments suggesting this trend might persist, the corporation’s overall revenue expansion was only 29% in 2024. In contrast, the company’s stock value skyrocketed by an impressive 410% within the past year. As for valuation ratios, Palantir is trading at a significantly high 112 times its price-to-sales (P/S) ratio. This suggests that investors have already incorporated expectations of substantial future prosperity into the current stock price.

For rapidly expanding tech firms, it’s common to find them trading at significant valuations as they mature. However, Palantir’s valuation significantly exceeds its current revenue level, which prompts some doubts. This could potentially put the stock at risk if the anticipated AI market potential doesn’t materialize, or if the adoption of enterprise AI progresses more slowly than anticipated.

Although deals are being signed at one point and income is flowing in later, this means that investors can anticipate a significant surge in revenue over the next few months. However, it’s crucial that performance remains exceptionally strong to sustain the current valuation, not just maintain it but also raise it higher.

There’s a delay between when deals are sealed and when money comes in, but this means investors should see a substantial rise in revenue soon. To keep up with the current valuation and potentially boost it more, execution needs to be nearly perfect.

Is Palantir a buy?

One can certainly find many appealing aspects in Palantir. It’s not just talking about ideas, but actually developing practical solutions. Furthermore, it collaborates closely with high-priority clients and is steadily establishing itself as a key player in the realm of artificial intelligence within enterprises.

Long-term investments involve looking beyond a compelling narrative alone. It’s crucial to evaluate if the underlying financial factors are robust enough to justify the current price tag.

At present, Palantir is still in the process of completing its tasks. The majority of its revenue is focused, and while commercial momentum is growing, it hasn’t yet achieved the point of unstoppable growth. Add to this a valuation that presumes outstanding achievement, and investing in Palantir remains a risky move with potential for high returns.

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2025-07-17 14:02