Palantir (NYSE:PLTR) might be on cloud nine after posting another solid quarter of earnings. Altogether, when you add in several contract wins, it seems like the data analytics company can’t put a foot wrong. However, there are genuine concerns about overvaluation here. Right now, PLTR stock is trading at nearly 110 times forward earnings, according to Yahoo! Finance.
There are multiple reasons why these worries are valid. Revenues are increasing, but not at a fast-enough pace. In addition, insider sales are ramping up and the company is looking to purchase gold and invest in special purpose acquisition companies (SPACs) when it could be repurchasing PLTR stock. Now stockholders are asking an obvious question: if shares are so valuable, why isn’t the company snapping them up?
Some sharper criticisms are aimed at the company’s inability to grow its commercial business to the level of its government contracts. Palantir’s robust growth is largely fueled by the U.S. government, which accounts for nearly 56% of total sales. This segment will continue to grow at roughly the same pace as Palantir’s commercial business — not great news for investors demanding diversification.
Understandably, these factors are weighing down sentiment. All told, considering the run-up in recent weeks, it’s best for investors to wait for PLTR stock to drop before buying more shares.
PLTR Stock: Building Out the Commercial Business Is Vital
Palantir is a leader in providing software platforms for institutions. It operates through two segments: Commercial and Government. The company’s Gotham platform lets users recognize patterns concealed within datasets, all without compromising anonymity or security through its proprietary extraction methods. Meanwhile, its Foundry software platform is geared toward commercial clients.
Palantir was co-founded by Peter Thiel, a Silicon Valley legend and co-founder of PayPal (NASDAQ:PYPL). Palantir went public late last year and was among the best stocks during the pandemic and beyond.
The reason why is simple: Palantir has several enviable defense contracts. That provides the data analytics company with smooth recurring cash flow, the likes of which other defense contractors would love to have. The only problem? Several members of Congress have taken a heightened interest in Palantir’s operations because of the close relationship the company enjoys with the defense establishment.
A great example is Palantir’s contract with U.S. Immigration and Customs Enforcement (ICE). The federal agency has been using the company’s Falcon platform for some time. Needless to say, the relationship between the two entities is controversial — in fact, it’s one of the principal reasons why Palantir has such a contentious reputation. However, there are rumors ICE is working to replace its dependence on PLTR products.
Regardless, Palantir’s reliance on high-level government contracts is not ideal. The field can entail a lot of negative publicity. As such, building out the commercial business would ultimately be a plus for PLTR stock.
ESG Investing and Its Impact on Palantir
There are larger trends to worry about when it comes to PLTR stock, however. In addition to the negative publicity, there is the ethical investor to consider.
Specifically, one 2020 Global Sustainable Investment Alliance study revealed that sustainable investments totaled $35.3 trillion worldwide. Importantly, millennials fuel much of this surge, being in their prime spending years. Over the past decade, they have invested billions in ESG (Environmental, Social and Governance) projects.
CoreCivic (NYSE:CXW) and GEO Group (NYSE:GEO) are two companies starting to demonstrate this investment shift. Founded in 1983 and 1984 respectively, both companies are prison real estate investment trusts (REITs) operating jails, penitentiaries and detention facilities. Since assuming office, President Joe Biden has laid down an aggressive federal plan for criminal justice reform, aiming in part to end the use of private prisons. This is just one example of the changing times and its effect on both political and investment circles.
Like with private prisons, these trends toward ESG will also have a massive impact on names like Palantir. That’s why it’s crucial the company builds on its commercial business and gives investors a reason to stick around.
PLTR Stock: A Great Name at the Wrong Price
At current rates, PLTR stock does not reflect the risk involved in investing in it.
Don’t think otherwise: there are risks involved here. However, if management is able to grow the commercial business by leaps and bounds, then investors may want to invest more in the company.
Palantir’s product is rock solid. Plus, the fact that its government contracts are being renewed shows that the company is doing something right. But the company also needs to tamper down its reliance on that side of the business.
That said, if PLTR stock declines further moving forward — and reflects the risk of investing in it — investors should be happy to pick up this one at a discount.
On the date of publication, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.