There’s plenty of evidence that Palantir‘s (NYSE: PLTR) stock is in a bubble. History is not on Palantir’s side, and many companies have traded around the lofty expectation its stock currently trades at, and few (if any) have worked out well for investors.
So, how can one of the most dominant AI software companies be in a bubble when business is booming? It’s simple: Expectations outweigh reality.
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To be clear, Palantir’s business is fantastic and will continue to grow. That part isn’t up for debate. Palantir offers a top-notch AI software product that allows its users to make the most informed decisions possible. This benefits governments that deploy its software as well as commercial businesses.
Its Artificial Intelligence Platform (AIP) product is also top-notch. It allows users to integrate generative AI models into a business’s inner workings rather than using them as a tool on the side.
But I draw the line at calling Palantir the Nvidia of the software world, as it’s in a far too competitive market to have that title.
Nvidia is in a world of its own in terms of performance compared to its peers, so it became the only choice. Palantir has competition from many directions. It’s competing against other companies that have pre-built AI models, consulting firms that have the talent to build these models for their clients, and individual contributors that are building these AI models for their own companies.
While Palantir has been successful so far, the number of clients it can sign is fairly limited. Palantir’s software is incredibly expensive, mainly because it is purpose-built for each application. In the third quarter, Palantir had 321 U.S. commercial clients, generating $179 million in revenue. If you annualize that revenue figure, you get an average revenue per customer of $2.23 million. This leaves out a lot of potential small and mid-sized clients and caps the maximum customer base Palantir can reach.
This isn’t a knock on Palantir or its product; it’s just the reality that not every business will use Palantir, whereas something like a Nvidia GPU might be deployed by a vast majority of businesses in one way or another.
However, the stock is trading like Palantir’s software will be used by everyone in every business worldwide.
In the third quarter, Palantir’s revenue grew 30% year over year. While that’s strong growth, it’s not nearly enough to justify the stock price.
