With a share price increase of 84% since the beginning of the year Palantir Technologies (PLTR 0.68%) is on a roll, especially after better-than-expected second-quarter earnings showed accelerating growth following the launch of new generative artificial intelligence (AI) tools. Let’s discuss how this opportunity might play out over the next three years and determine whether Palantir can grow into its uncomfortably high valuation.

Second quarter results spark new AI optimism

The last few weeks have not been particularly favorable for AI companies, especially on the hardware side. Industry leaders such as NVIDIA, Advanced micro devicesAnd Super-microcomputer have fallen sharply from their all-time highs amid concerns that this new technology may be more hype than substance. However, Palantir’s impressive second-quarter earnings argue for further investment.

Total revenue rose 27% year over year to $678 million. While Palantir is best known for its government and defense contracts, its smaller U.S. business segment may finally be coming into its own, growing 55% to $159 million, or just over 20% of total revenue.

Palantir’s commercial business provides software solutions to analyze and manage big data for the private sector. The rise of this segment could bring several important benefits in the coming years. Unlike government contracts (which can be inconsistent depending on the incumbent or flaring global conflicts), being in the private sector could bring stability and predictability to Palantir’s activities. It also shows the value of its recent pivot to generative AI.

The next three years could depend on AI

So far, the AI ​​industry primarily Hardware giants like Nvidia, which produce the computer chips needed to run and train consumer-oriented large language models (LLMs). However, the software side of the industry may not live up to expectations. Some analysts at Goldman Sachs say the huge spending on hardware may never pay off. Palantir could help change that trajectory in the coming years.

Palantir has integrated generative AI tools into its existing machine learning and data analytics software to create its Artificial Intelligence Platform (AIP). In battlefield scenarios The AIP can provide operators with real-time information about potential threats and targets. However, in the private sector, it can help companies analyze internal data to gain valuable insights and increase security and operational efficiency.

Image source: Getty Images.

Management claims to be experiencing “unprecedented” demand for these services. Palantir has signed several AIP-related contracts with major companies, including the nonprofit senior advocacy group AARP, which will use the system to personalize user experiences, and the Japanese electronics group Panasonicwhich will use the platform to optimize its finances, quality control and production.

But while Palantir, partly funded by the CIA, has a deep Economic divide in public contracts due to its trust, track record and resilience to bad publicity, it is unclear what sets it apart from its private sector competitors – especially as competitors such as Microsoft And Snowflake are also implementing AI-related features into their data analytics offerings. Palantir could face increasing competition over the next three years, which could slow its explosive growth in the private sector.

Is Palantir stock a buy?

A potentially weak moat is not the only challenge facing Palantir. The stock is also heavily overvalued. With a Price-earnings ratio (P/E) multiple of 91Stocks are unsustainably expensive. For context: Nasdaq-100 has an average estimate of just 29, and business software giant Microsoft is appreciated with a P/E ratio of only 32.

While growth stocks sometimes trade at a premium because investors are optimistic about their prospects, Palantir appears to be perfectly valued. And there is a significant There is a risk that the shares will underperform over the next three years, even if the underlying business is successful.