Palantir (NYSE:PLTR) stock is up notably this year thanks to commercial income, which has increased significantly, therefore offsetting its strong dependence on government contracts.

Palantir, often under the scanner for its relations with the defense establishment, is now quietly creating quite a reputation within the commercial sphere. One main driver of this expansion is Palantir’s AI platform, which companies are progressively using. Palantir is also qualified for inclusion in the S&P 500 as it has four straight quarters of GAAP profitability, therefore improving the stock performance even more.

What’s more, there is a certain section of investors that will highly value Palantir for its agreements with the U.S. Department of Defense. This kind of consistent, recurrent cash flow is highly coveted.

But considering the year-to-date gain of 63%, Palantir stock is overvalued by most major metrics, making it the ideal time to part ways with a certain portion of your holdings and invest in companies with upside potential not realized in the current market.

Palantir stock has seen several highs and lows this year. The stock struggles at $30; it retreats whenever it nears that level; resistance is $20. Selling Palantir shares at $27.18 makes sense.

Impressive Growth and Strategic Alliances

Palantir shares saw double-digit gains in the first half of the year. However, knowing why is crucial.

Palantir Gotham, Apollo, and Foundry have used big data for years. Still, Palantir’s main offering is its AI Platform. AIP helps organizations grow AI models with over 1300 Bootcamps globally.

The Model Catalog, introduced in April, enables users to browse Palantir models in AIP. Companies may easily integrate and apply AI models for several purposes using this technology.

In July, AIP Logic Evaluations provided dependable, high-quality AI process outcomes. This tool lets users properly test and certify AI models for production use.

In addition, Palantir and Voyager Space are collaborating to enhance military research, communications, and space and defense intelligence. The partnership manages International Space Station payloads and creates a “Customer Hub” for expedited requests using Palantir’s Foundry and AI technology.

Carahsoft and Palantir provide mission-critical software to the Canadian government. Canadian government organizations may better use Palantir’s AI-powered financial crime prevention and healthcare delivery solutions by collaborating.

Oracle (NYSE:ORCL) and Palantir are also collaborating. Through this partnership, Palantir’s AI and data analytics skills and Oracle’s cloud infrastructure accelerate AI adoption across sectors.

These activities keep Palantir expanding. Palantir’s commercial contracts earned $299 million in Q1 2024, up 27% year over year. Palantir added $150 million in U.S. commercial revenue, up 40% year over year.

Government Contracts Bolstering Revenue

Palantir recently received a $480 million contract from the Chief Digital and Artificial Intelligence Office of the Pentagon to develop and incorporate artificial intelligence technology across many DoD platforms. This covers a $153 million first purchase for the Joint Staff and for implementing the Maven Smart System at certain combatant commands.

Additionally, Palantir won a $178.4 million contract for the development of the next-generation targeting system, Tactical Intelligence Targeting Access Node. This system links Army units with high-altitude and space sensors to provide thorough targeting data.

Palantir secured several contracts from the US Air Force totaling more than $100 million to offer data-as-a-service platforms. Among other sites, these systems will assist mission-critical activities at the National Space Defense Center and the Combined Space Activities Center.

Palantir, in total, earned $335 million from government contracts in Q1 2024, a 16% year-over-year increase shown in. Recent noteworthy government contracts include a $480 million contract for the Maven Smart System prototype from the Department of Defense, a $178 million contract for the Army’s Tactical Intelligence Targeting Access Node, and several smaller contracts totaling roughly $169 million in recent months.

Palantir Stock Faces Skepticism Amid High Valuation

A number of eminent experts have made pessimistic comments about Palantir shares. Concerned about what he sees as an “unprecedented generative AI hype cycle” and the stock’s high valuation multiples, Brian White of Monness, Crespi, & Hardt recently downgraded Palantir stock to a “strong sell.”

More general market questions also surround Palantir’s valuation and its dependence on government contracts. Though its commercial business expansion and artificial intelligence projects show promise, doubts about its long-term profitability and market positioning persist.

With a price-to-earnings ratio of 226.5x, Palantir stock is worse than 95% of the 1,531 software companies that were looked at. Execution is not the issue for Palantir. However, as White says, Palantir stock is trading at “an egregiously rich valuation.”

White’s analysis mirrors the consensus opinion on Palantir stock as well; the stock holds a consensus rating of “Hold,” and the average price target is $22.42, representing a 17.5% downside from the current price of $27.18.

With the way things are, it’s worth selling a portion of your Palantir stock and investing in other growth areas.

On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.