Palantir (NYSE: PLTR) has been around as an artificial intelligence (AI) software company for a while. It started back in 2003 as a platform to help government intelligence agencies process data better. More recently, Palantir has expanded outside its core market into the public sector. Palantir’s years of experience with AI, coupled with an impressive client list, gives credence to its product, but it also has a secret weapon that kick-started its growth, especially in the public sector.

Management has described the demand for this product as “unprecedented,” which has fired up investors about Palantir’s stock. So, what’s Palantir’s new product that has everyone buzzing?

Palantir’s AIP is a game changer

While hundreds of companies have AI models built to perform specific tasks, there aren’t many practical ways to integrate AI into a business’s inner workings. Furthermore, many companies are worried that if they integrate their data into third-party AI models, their data could become compromised.

That’s where Palantir’s Artificial Intelligence Platform (AIP) comes in. AIP allows users to easily develop various applications within a business that deploy AI in practical ways. Although the applications are practically endless, some use cases involve automating accounts payable, integrating consumer data with customer service teams, and resolving warranty claims.

AIP has been a huge success for Palantir, and it’s having the biggest effect on its U.S. commercial business. In Q1, Palantir’s U.S. commercial customer count rose 69% year over year and 19% quarter over quarter. Revenue from this segment was up 40% year over year to $150 million. But here’s the kicker: That revenue only came from 262 customers.

With relatively few clients subscribing to Palantir’s products, the runway for growth is massive. However, one caveat to that analysis is the software’s price. With 262 customers generating $150 million in quarterly revenue, the annual subscription price is an average of $2.29 million among that cohort. Few companies can afford to shell out that much each year for software, but with the power these AI models give businesses, the cost may be worth the price of admission.

But that’s only the U.S. commercial base. Currently, AIP hasn’t seen much government interest, but management believes that will change. Governments are doing their due diligence (as they should) before heavily integrating AI into their inner workings. Considering that U.S. government revenue made up more than 40% of Palantir’s total in Q1, it’s a massive opportunity.

But does all that translate into a stock that’s worth buying?

The stock already has success priced in

The market isn’t blind to Palantir’s top-tier AIP product and growth opportunities, so it’s not cheap. Although Palantir is profitable, its margins haven’t reached their maximum potential, so using a more traditional metric like the price-to-earnings (P/E) ratio isn’t applicable in this scenario. Instead, I’ll use Palantir’s price-to-sales (P/S) ratio to value the company.

At 24 times sales, Palantir is an expensive stock.

PLTR PS Ratio Chart

PLTR PS Ratio data by YCharts

While Palantir is growing at a healthy pace, whenever a company’s P/S ratio is above its revenue growth rate, that’s a red flag. However, if AIP starts to catch hold in the government division, its growth could rapidly accelerate and climb to a higher value than its valuation.

So, what should investors do? I think Palantir will be a massive winner from widespread AI adoption, but that success is already baked into the stock. If you want to own some Palantir shares, I don’t think there is anything wrong with that, but be aware that any slip-up in a quarterly earnings report could ignite a massive sell-off.

AIP is Palantir’s secret weapon in the AI arms race. The problem is that the weapon has become less secret, and the market has already priced in the success of that rollout.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

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