Palantir’s Artificial Intelligence (AI) platform soars. Is this stock’s secret weapon? | The motley fool

Palantir (PLTR 1.29%) has been around as an artificial intelligence (AI) software company for a while. It started in 2003 as a platform to help government intelligence agencies process data better. Recently, Palantir has expanded outside its core market into the public sector. Palantir’s experience with AI, along with an impressive list of clients, lends credibility to its product, but it also has a secret weapon that launched its growth, particularly in the public sector.

Management has described demand for this product as “unprecedented,” which has fired investors for Palantir stock. So what’s the new Palantir product that’s got everyone buzzing?

Palantir’s AIP is a game changer

While hundreds of companies have AI models built to perform specific tasks, there aren’t many practical ways to integrate AI into the inner workings of a business. Additionally, many companies are concerned that if they integrate their data into third-party AI models, their data could be compromised.

This is where Palantir’s Artificial Intelligence Platform (AIP) comes in. AIP allows users to easily develop various applications within a business that deploy AI in practical ways. Although the applications are virtually endless, some use cases include automating accounts payable, integrating customer data with customer service teams, and resolving warranty claims.

AIP has been a huge success for Palantir and has the biggest effect on its US commercial business. In the first quarter, Palantir’s number of commercial customers in the US grew 69% year-over-year and 19% quarter-over-quarter. Revenue from this segment grew 40% year over year to $150 million. But here’s the kicker: That revenue came from just 262 customers.

With relatively few customers subscribing to Palantir’s products, the runway for growth is massive. One caveat to this analysis, however, is the price of the software. With 262 customers generating $150 million in quarterly revenue, the annual subscription price averages $2.29 million in that group. Few companies can afford to pay that much each year for software, but with the power these AI models give businesses, the cost can be well worth the price of admission.

But that’s just the American trade base. Currently, AIP has not seen much interest from the government, but management believes this will change. Governments are doing their due diligence (as they should) before heavily integrating AI into their domestic work. Considering that US government revenue made up more than 40% of Palantir’s total in the first quarter, it’s a big opportunity.

But does all this translate into a stock worth buying?

The stock already has a successful price

The market isn’t blind to Palantir’s high-end AIP product and growth opportunities, so it’s not cheap. Although Palantir is profitable, its margins haven’t reached their maximum potential, so using a more traditional metric like the price-to-earnings (P/E) ratio isn’t applicable in this scenario. Instead, I will use Palantir’s price-to-sales (P/S) ratio to value the company.

At 24 times sales, Palantir is an expensive stock.

PLTR PS report data by YCharts

While Palantir is growing at a healthy pace, any time a company’s P/S ratio is above its revenue growth rate, that’s a red flag. However, if AIP starts to take hold in the government division, its growth could accelerate rapidly and climb to a value higher than its valuation.

So what should investors do? I think Palantir will be a massive winner from the widespread adoption of AI, but that success has already been baked into the stock. If you want to own some Palantir stock, I don’t think there’s anything wrong with that, but be aware that any slide in a quarterly earnings report could spark a massive selloff.

AIP is Palantir’s secret weapon in the AI ​​arms race. The problem is that the weapon has become less secret, and the market has already appreciated the success of that appearance.