Why Wall Street May Be Completely Misunderstanding This AI Stock

For most of this year, Wall Street analysts haven't encouraged investors to buy one particular artificial intelligence (AI) stock -- even though this company has delivered earnings growth and has spoken of soaring demand for its products. The problem? Valuation. Most analysts have a "hold" recommendation on the stock as they worry that the company's high valuation will weigh on performance.

But it's possible that Wall Street may be completely misunderstanding this AI stock. While valuation is important, there are many other factors to consider -- and this player has announced certain achievements that make it a good long-term investment in spite of its valuation right now. Let's take a closer look at one key element that Wall Street might be overlooking.

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A game-changing platform

First, though, it's time to reveal the name of the company I'm talking about -- and that's Palantir Technologies (NASDAQ: PLTR), a player that's seen demand for its AI-powered software platform take off in recent years. Palantir is in the business of helping customers make better use of their data -- this may sound ho-hum, but it's actually a game changer for many, resulting in streamlined operations or even new discoveries.

Over time, government contracts have driven Palantir's progressive and steady growth, but over the past few years, commercial customers have been on the rise -- and Palantir's revenue has exploded higher. A key part of this is the company's release of its Artificial Intelligence Platform (AIP) in 2023. This system, driven by AI, aggregates and analyzes a customer's data and helps the customer use it to make decisions or develop new programs or strategies. In this AI boom, Palantir has drawn attention as AIP allows customers to immediately apply AI to their real-world situations and problems.

All of this has led to gains in revenue, profit, contract value, customer count, and more, and this trend has continued quarter after quarter. In the most recent period, for example, U.S. commercial revenue climbed in the triple-digits, and U.S. government revenue advanced in the double-digits. The company closed a record $2.76 billion in total contract value, up 151% from the previous year. And Palantir raised forecasts for full-year revenue, adjusted income from operations, and adjusted free cash flow.

What Wall Street may be missing

All of this, including Palantir's comments about strong demand for its platforms, is positive. Now let's consider the point Wall Street may be missing, and that's the idea that today's tech leaders, at some moment in the early stages of their growth stories, have gone through times of excessively high valuations -- like Palantir today.

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The valuations of these players have since come down to reasonable levels as their development and earnings growth have progressed. It's very common for high-growth tech companies to see this pattern as investors pile into their shares before they've reached certain goals. It's important to remember that valuation takes into account recent earnings or even estimates for the coming year -- but it doesn't consider earnings potential farther down the road.

Consider the long term

This doesn't mean we should ignore valuation and pile into Palantir or any other player that seems pricey. It's important to consider, with the information available today, the company's long-term prospects and the overall earnings and demand picture right now. With all of this in mind, we can then determine which companies look like potential long-term winners -- and an investment in the present, even at a high valuation, could lead to solid gains over the years to come. Still, it's also key to keep in mind that economic troubles or other external factors might impact a company's earnings and stock performance at any point.

So, what does this mean for Palantir? Though valuation is high today, it isn't necessarily a reason to avoid this high-potential AI stock. Of course, Palantir isn't the best choice for a value investor or a very cautious investor -- the stock involves some risk as the current valuation still could discourage some from buying, and the company also could suffer from any possible decline in AI spending, for example.

But growth investors looking for potential long-term AI success stories, within the context of a diversified portfolio, might consider picking up some shares of Palantir right now -- in spite of Wall Street's valuation concerns.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.