I have been down on Palantir stock (NASDAQ:PLTR) for some time.

It is, at its heart, a government contractor. Calling it an AI stock doesn’t change that.

Military contracting is a profitable but slow-growth business. Palantir brought almost 10% of last year’s $2.25 billion in revenue to the bottom line.

The question is always whether it can do better, or grow faster, given the constraints of its business model. Like a political consulting firm, it can only play on one side of the street.

I’m glad it’s our side.

Palantir’s Commercial Arm

The bull case for Palantir stock has always been built on its commercial contracts.

Palantir has been doing well in hospitals, planning and scheduling people and equipment.

It makes sense. Hospitals need data security. Palantir’s software can anticipate demand and plan accordingly, faster than people can. It’s not just replacing whiteboards and spreadsheets. It is very much a Machine Internet application.

Now Palantir is exploring a new niche, ad agencies. The idea is that it can use inventory and demand data to optimize ad campaigns, buying ads and adjusting prices to maximize clients’ return. It’s bringing tools first written for logistics into sales and marketing. It’s getting a hearing.

This may be why the asset manager for Norway’s biggest bank recently cut his positions in Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) and Microsoft (NASDAQ:MSFT) to buy more Palantir. Bruce Kamich of TheStreet recently hiked his price target to $48 per share. This helped the stock stay hot during the first quarter, rising by over one-third.

But since April began, it’s down 19%.

The Bear Claw

AI is one of those Internet buzzwords that make you swoon.

But isn’t Palantir getting a little ahead of itself, our Louis Navillier asks? Growth isn’t accelerating, nor is it expected to. It will certainly be profitable this year, and could be added to the S&P 500 at any time, forcing index funds to buy it.

But even if Palantir hits its top earnings estimate of 41 cents per share, you’re paying 49 times that to own it. That’s based on April 19’s closing price of $20.31.

The nosebleed valuation has some analysts downgrading the stock. Hype cycles, and AI is a hype cycle, are fragile things. Technologies always disappoint before they show their value.

Palantir’s Key Ally

While Palantir drew early interest by working with Cloud Czars like Microsoft, its alliance with Oracle (NASDAQ:ORCL) may be more important.

The two companies are sympatico on a deep level. Oracle was late to the cloud because it remains highly proprietary. Palantir is also highly proprietary.

But getting in late beats not getting in at all. Over the last 2 years Oracle stock is up 50% on the strength of its cloud. Its market cap is up to $315 billion. The deal also puts a floor under Palantir stock. If it falls, Oracle could buy it.

The Bottom Line

The wars in Ukraine and Gaza are very, very good news for Palantir. So is the rise of China. It’s prepared to exploit that through former Congressman Mike Gallagher, one of its new hires.

War is unhealthy for economies and other living things. It’s also very good for military contractors, especially those on the cutting edge like Palantir.

But getting Palantir stock to $48/share, or even $30, depends a lot more on its commercial arm than its military wing.

I wouldn’t rush to buy Palantir here. The recent wobble in AI semiconductor stocks like Nvidia (NASDAQ:NVDA) may spread. But keep it in mind the next time animal spirits are feeding your view of the market. The long-term view of the business is positive.

As of this writing, Dana Blankenhorn had a LONG position in AAPL, MSFT, and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his free Substack newsletter.