Interestingly, artificial intelligence and big data solutions are integral to Palantir Technologies’ (NYSE:PLTR) stock as reliance on AI grows.

This is a stock that investors would expect to outperform many of the AI-adjacent stocks that have rocketed higher this year. 

Since the introduction of ChatGPT in November 2022, AI stocks have surged in investor interest. Companies are boosting AI investments, as evident in a 64% year-over-year increase in AI mentions during Q1 2023 earnings calls, according to Bank of America Global Research’s Savita Subramani.

On a year-to-date basis, PLTR stock is up around 130%. That’s not bad, but it’s still 55% below its peak.

Here’s why I think enthusiasm around artificial intelligence technology may not be enough to support this company’s valuation.

A Closer Look at PLTR Stock

Palantir has sparked diverse opinions since its September 2020 IPO, impressing with growth and government-related contracts for its big data services.

Starting at $10 per share, its stock surged to $39 in January 2021 amidst meme and growth stock excitement.

However, Palantir’s shares now sit around $14 apiece due to subdued growth and higher interest rates impacting valuations (and that’s after more than doubling this year).

Previously, its enterprise value reached $68 billion, 44-times its 2021 revenue estimate. Now at $19 billion, it’s still not a compelling deal at 9-times current year’s sales.

Are Recent Earnings Sustainable?

Palantir’s recently-reported Q2 net income of $28M ($0.01/share) was touted as the company’s third consecutive quarter of profitability.

First, 1% per share in earnings isn’t much to write home about. And second, Palantir has been around (and unprofitable) for decades, with many an investor crying uncle in the past when the company chose growth over profitability. 

The company’s revenue was up 13% year-over-year. However, it’s clear that costs are increasing as fast as revenue, and Palantir isn’t improving its margins.

A company can get all the government contracts they want, but those are supposed to be lucrative, with high margins. This is a suspect business, if it can’t pump out serious cash flow with its current clientele mix.

Some analysts are bullish on this stock, with Wedbush’s Dan Ives raising his price target on PLTR stock by 15%. While potential success is possible, at 16-times revenue, it becomes much more difficult.

Palantir offers cloud software to civilians, its AI platform gaining interest, but the company provided no updated guidance. Its customer count rose 38%, but growth peaked at almost 50% in 2021, and has been declining since.

What Now

While Palantir’s business may stabilize, its stock remains relatively pricey compared to peers, trading at 9-times this year’s sales.

In comparison, Alteryx is at 3-times and Salesforce at 6-times. While Palantir’s growth potential exists, the stock could halve before becoming a true bargain in this volatile market.

Investors should monitor PLTR stock in this environment, but I think a continued rally from here is unlikely.

Palantir’s true worth is the aggregate value of the company’s stream of future cash flows, not AI-related hype. While Palantir is heavy in the hyper category, it provides much to be desired in its financials. 

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.