The growing utility of artificial intelligence (AI) promises to have a profound impact on our lives. While the technology is still in its infancy, generative AI is improving by leaps and bounds, with new use cases littering the landscape.

One of 2024’s biggest beneficiaries is Palantir Technologies (PLTR 11.14%). The stock is up more than 240% so far this year and up 820% since AI captured the spotlight in early 2023. Gains of that magnitude have also sent the stock’s valuation soaring, making some investors understandably skittish.

Let’s take a look at the driving force behind Palantir’s ascent, what Wall Street has to say about the matter, and whether the stock is a buy right now.

Image source: Getty Images.

Riding the wave of AI

Palantir rose from the ashes of the 9/11 terrorist attack on the premise that siloed intelligence data contained a number of clues that could have prevented the tragedy. Founder Peter Thiel envisioned a system that could pull data from a variety of sources and apply sophisticated algorithms to connect seemingly disparate pieces of information to identify would-be terrorists before they could act. Palantir was the fruit of that vision and became the go-to for U.S. intelligence agencies and our allies.

The company has since expanded beyond its original defense offerings, applying the AI knowledge it developed to serve enterprise companies, using its data mining and business analytics expertise to provide customers with actionable intelligence.

The game-changer came early last year when Palantir introduced its Artificial Intelligence Platform (AIP), which harnesses generative AI to make its systems even more useful to enterprises. By tapping into existing data, AIP can address company-specific issues, providing solutions that might otherwise be missed.

For example, in a demo video, Palantir illustrates how AIP can leverage company data to minimize production disruptions in the face of an oncoming hurricane. The system scrutinizes remaining orders and recommends which ones to accelerate, delay, or cancel. It also suggests which ones should be handed off to other fulfillment centers and how pursuing alternate delivery options will impact backlogs and profits.

In another masterstroke, Palantir took much of the guesswork out of implementing AI solutions by hosting boot camp sessions. “These immersive, hands-on sessions allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations,” Palantir wrote. The ability to address real-world business problems has fueled robust demand for these boot camps, resulting in accelerating the conversion of AIP deals.

The unbridled success of AIP has had a telling effect on Palantir’s results. In the third quarter, revenue grew 30% year over year, while adjusted earnings per share (EPS) jumped 43%, but that only tells part of the story. Palantir’s U.S. commercial revenue, which houses AIP, jumped 54%, and the segment’s customer count grew 77%. Furthermore, the segment’s remaining deal value — which provides insight into upcoming results — increased by 73%. So, the future is bright.

What does Wall Street have to say?

The recent run-up in Palantir’s price has understandably sent up a red flag for some investors as it has come with a commensurate increase in its already frothy valuation. The stock is currently selling for 157 times forward earnings and 39 times forward sales, which is egregious no matter how you measure it.

This has many on Wall Street moving to the sidelines. Of the 20 analysts who cover Palantir, only four rate the stock a buy or strong buy, while 10 recommend holding, and seven rate it a sell.

The most recent bearish take comes courtesy of Jefferies analyst Brent Thill, who points to Palantir’s pricey valuation as the problem. He acknowledges the accelerating sales and profit growth, saying the “fundamentals are alive,” but calculates that Palantir would need to generate 40% year-over-year revenue growth in each of the next four years to justify the current valuation. Argus Research analyst Joseph Bonner concurs, suggesting that if Palantir’s growth story were to stumble, “the market tends to punish in highly valued tech stocks.”

On the other hand, Greentech Research analyst Hilary Kramer posited that Palantir “easily can be” a $100 stock, suggesting Wall Street needs to come to terms with the company’s accelerating growth, which she believes has just begun.

To be clear, Wall Street has a consensus rating of hold, which suggests investors should exercise care in buying the stock or simply avoid it altogether, at least for now. And these analysts have a point: Any failure to deliver from Palantir, real or imagined, could easily result in the high-priced stock taking a hit and registering double-digit share price declines.

I think Palantir stock is still a buy, but…

So, what does this mean for investors worried they might miss out on the growth story of the year? I personally believe Palantir has a bright future, but I’m also aware of the potential for significant volatility — particularly in the wake of the stock’s 800% price spike since the start of 2023.

In cases like this, I tend to buy a small stake in a company, which forces me to watch the stock, paying particular attention to its future performance. This also gives me the option to add to my position at a more attractive valuation (or not), depending on how the future unfolds. Dollar-cost averaging is also an important strategy, as it allows investors to build a position, buying more shares when the price is down and fewer when the price is higher.

If Palantir’s growth continues to accelerate — and I believe it will — investors will want to own a piece of this compelling growth story, but they don’t need to bet the farm to hold a stake.