Let’s be realistic: Palantir (PLTR 2.98%) is irresistibly cool. How could this not be the case? The company name comes straight from Lord of the Rings; the name of its flagship product, Gotham, is straight out of a comic book; and its main objective: to use artificial intelligence (AI) to identify and stop terrorist threats that would not have been detected by human agents — this could be directly Mission: impossible.

The stock is up 161% year to date, and this AI-driven “cool factor” is likely part of why it’s attracted investors’ attention lately. After all, many investors clearly think AI stocks are pretty attractive, but some — looking at you, c3.ai And Super microcomputer – have fallen recently as they have failed to meet high expectations. Palantir, on the other hand, has not disappointed…yet. But as these other companies show, “cool” alone isn’t enough to satisfy investors. Can Palantir’s stock price continue to rise, or is it already too expensive to buy, no matter how cool it is?

Rapidly growing revenues

Palantir’s revenue growth has been surprisingly steady for such a young company, but that doesn’t mean it hasn’t been strong. In the most recent quarter, revenue increased by 55% compared to the previous year. However, most of this revenue comes primarily from a single customer: the US government, which provides 75% of Palantir’s current revenue.

Palantir provides its Gotham threat management software to many U.S. defense and intelligence agencies, allowing Gotham to access and comprehensively analyze siled data from agency systems. Naturally, the more agencies use Gotham, the more data they can analyze and the better their results. This increase in benefits represents a competitive advantage for the company’s government revenues. In order to move to a new system from Gotham, multiple agencies would have to approve the change and allocate resources to make it happen, which would be a costly and complex process.

In addition to its ever-increasing government revenues from Gotham, Palantir has rolled out a number of commercial products for its growing number of enterprise customers. The first of these products, named Foundry, works in a similar way to Gotham, leveraging AI to analyze siled information – in this case, within different departments or business units within a company. The company’s commercial products are popular: commercial revenue growth has actually outpaced overall revenue growth. In its most recent quarter, Palantir’s number of commercial customers grew 83% year over year.

Stock prices growing faster

Whether because of the company’s impressive growth numbers or its cool factor, investors started taking notice of Palantir last year. The company’s stock price, which was below $6.50 per share in early 2023, is currently above $42 per share, a return of more than 500%. That gives the company a market cap of just under $100 billion on 12-month revenue of just under $2.5 billion.

That’s a high valuation, even for a fast-growing company. This gives Palantir a price/sales ratio (P/S) of approximately 41 times sales. In comparison, even the tech giant Nvidiawhich is also expected to benefit from continued AI growth, only trades at around 36 times sales. Other data-related companies are nowhere near as popular. Data Dog only has a P/S ratio of 19 times. Snowflake headquarters 12 times, and all three have grown revenue faster than Palantir over the past year.

Is it still a purchase?

Palantir has recently gained a lot of attention due to its addition to the S&P500. That – plus the cool factor – likely contributes to the stock’s high valuation. Dynamic growth stocks that are perfectly priced often experience a correction at the first signs of a potential slowdown in growth. Datadog and Snowflake are both good examples. At the end of 2021, Datadog’s P/S ratio was over 60 and Snowflake’s was over 100. They were unable to maintain these valuations and their stock prices fell. I wouldn’t be surprised to see something similar happen at Palantir, as the growth of AI increases potential competition for government AI spending.

That said, as a clear pioneer in this area and as a company that appears to be experiencing growing demand for its products and successfully expanding into new markets, Palantir is poised for long-term success. I like its prospects for future growth, although it may take longer than I would like to justify its high valuation.

Ultimately, I would buy Palantir to hold for the long term, but given its sky-high valuation, there are other companies I would buy first. I will keep Palantir on my watchlist to reconsider if its stock price declines.