Shares of artificial intelligence (AI) software play Palantir (PLTR 1.83%) rose 10.8% this week through 12 p.m. ET Thursday, according to data from S&P Global Market Intelligence.
Although there wasn't much financial news for Palantir this week, the company did announce two contract wins. Those wins seemed to justify a bullish Wall Street analyst call on Palantir that was published on Monday.
Argus initiates at buy
Palantir certainly got off to a good start this week. On Monday, analyst Joseph Bonner from sell-side research firm Argus Research initiated coverage on the stock with a buy rating.
While Bonner acknowledges that shares do trade at a hefty premium, he's a believer in Palantir's differentiation and product improvement on the back of Palantir incorporating more artificial intelligence layers within its software. And while the company's past has been dominated by high-profile government clients like the Department of Defense and CIA, Bonner sees the high-growth commercial segment as the key to his buy call.
That appears to make a lot of sense, as the company's commercial revenue grew 27% last quarter, compared with 16% growth in government revenue. Palantir's U.S. commercial revenue surged an even higher 40%.
Overall commercial revenue has nearly caught up to Palantir's government revenue, at $299 million and $335 million, respectively, last quarter. But as the commercial segment seems poised to overtake the government segment soon, Bonner's thesis that Palantir will become more a commercial story appears to carry weight.
On that note, Palantir actually announced two contracts this week, one commercial and one government-oriented. On Thursday, Palantir announced Starlab Space, a U.S.-led joint venture between several international companies for space exploration, had named Palantir as a commercial partner. According to the release, Starlab will use Palantir's technology to "optimize resource allocation, mission planning, and overall system performance, reducing operational costs and streamlining on-board operations for the Starlab crews."
Also on Thursday, Palantir announced it had been selected by the Advanced Research Projects Agency for Health (ARPA-H), a unit within the Department of Health and Human Services, to help the agency execute big data-driven research. This is an exciting new contract, as the ARPA-H engages in frontier biomedical and health research that isn't easily done by commercial for-profit ventures.
Palantir is a changemaker company, but are shares expensive?
Palantir has done a great job of harnessing AI and expanding its commercial customer count while also dramatically improving its profitability. However, shares now trade at a whopping 215 times trailing earnings and even 78 times next year's earnings estimates.
At that valuation, investors are already pricing in lots of good news, anticipating the company will either maintain its growth rate for many years, or even accelerate it. That's difficult to do for a company as it gets larger. And while Palantir is proving itself to be a great operator and a difference-making company, investors should be prepared for a potential pullback in this expensive stock on any hint of disappointment.
