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The artificial intelligence (AI) industry is on fire in 2024, sending AI-related tech companies to the stratosphere. Nvidia, Microsoft, and Alphabet are some of the apparent winners.

Similarly, Palantir (NYSE: PLTR), a leading AI software company, has seen massive interest from customers and investors alike. The revenue growth rate improved in recent quarters, while the stock price increased by more than 56% in the first half of 2024.

While Palantir’s prospects look bright, I can’t convince myself to buy the stock — at least, not until I become more comfortable with some of its major risks.

Image source: Getty Images.

Palantir is well positioned in the AI race

Palantir might not be a well-known customer tech name like Amazon and Alphabet. Still, it has been a critical player in the enterprise-software sector, especially in serving the government sector.

Founded in 2003 to help the U.S. government in counterterrorism operations, Palantir has, over the years, expanded to serve public sectors in the U.S. and abroad. With the help of Palantir’s Gotham platform, government agencies gain insights from unstructured data sources (internal and external). These insights guide them in making critical decisions, many of which are matters of life and death.

With the experience gained from serving the public sector, Palantir entered the commercial sector with its Foundry platform, helping massive corporations analyze complex datasets to enhance decision making and business operations. So, while AI technology might have gained the limelight lately, Palantir has been utilizing it over the years to help its clients make sense of their vast data sources.

Since last year, unsurprisingly, Palantir has been favorably positioned to leverage the heightened interest in AI to offer AI solutions. For instance, the tech company launched the Artificial Intelligence Platform (AIP) in April last year, enabling existing clients to leverage the latest AI technologies (such as large language models) on their existing data and infrastructure. The company also introduced the AIP boot camp, allowing potential clients to experience the impact of AI on their existing business operations.

Statista estimated the AI market will reach $184 billion in 2024 and could grow to $827 billion in 2030. With revenue of $2.2 billion in 2023, Palantir’s prospects look almost infinite relative to the opportunity ahead.

But there are significant risks to consider

While the opportunity seems almost unlimited for Palantir, there are still hard questions investors must ask before jumping on the bandwagon.

Topping the list is whether the recent interest in AI will be sustainable or fizzle out, just like the metaverse did in the last few years. For instance, JP Morgan estimated the metaverse would generate an annual revenue of $1 trillion in its 2022 report. But two years later, everyone seems to have lost interest in this area. In fact, Statista estimates the industry will reach $74 billion in 2024.

If the AI trend proves to be just a fad, or if the AI industry develops much slower than anticipated, AI software companies like Palantir will face a similar fate. Thus, while Palantir’s 2024 first-quarter growth rate improved to 21% (up from 18% in the same period last year), there needs to be more evidence of the sustainability of the recent trend — at least a few more quarters of improving growth rates to confirm the sustainability of the tailwind.

Besides, I’m also wary about Palantir’s sky-high valuation. For perspective, the stock trades at a price-to-earnings (PE) ratio of 215. Comparatively, Alphabet trades at a PE ratio of 29 times.

If Palantir fails to meet investors’ expectations, or if the AI trend proves to be weaker than expected, the stock price could plunge to reflect the new reality. The risk is enormous. Palantir’s stock must fall by more than 85% to reach Alphabet’s valuation.

What it means for investors

Many argue that the AI tailwind is one of the biggest trends in a generation, one that will revolutionize work and personal lives.

Palantir could be one of those huge winners — at least, that’s what its ardent supporters think. The company has proven tools to help customers reap the value from AI on day one, a massive advantage compared to many young start-ups still changing their offerings.

Still, I’m not convinced that Palantir’s stock is a good value. It’s too expensive, and I’m unsure if the interest in AI among corporations is sustainable over the longer term. I will remain on the sideline until I become more comfortable with these two issues.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, JPMorgan Chase, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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