The AI race is growing tougher day by day, but Palantir Technologies (NYSE:PLTR) stock has proven that it’s not too behind the competition. 

In fact, the company has made solid progress in achieving key milestones in its AI capabilities and shown the ability to secure contracts in this realm. Palantir recently partnered with the U.S Army with a $178 million TITAN contract. After this announcement, many analysts have raised their price targets for PLTR stock, with some reaching as high as $35 per share. Indeed, Palantir does appear to have strong growth prospects. Recent earnings report also show that the company is now earning money at a pace exceeding expectations.

The AI company thrived with its robust AI platform, integrating machine learning to dissect data for deep insights across various sectors. Analysts have praised its commercial progress, with 32% year-over-year growth in Q4, propelling PLTR stock 41% year-to-date.

To add, there is also evidence also show Palantir’s rapid growth, fueled by enthusiasm for its AI Platform. However, facing tough competition, the company’s long-term growth prospects may diminish. A high valuation, the potential for waning enthusiasm, and likely bumps in the road for profitability, are key factors investor will want to keep an eye on.

With that said, let’s dive into the bull and bear case behind PLTR stock.

The Bull Case

In recent weeks, Palantir’s AIP garnered significant orders and revenue. Wedbush analyst Dan Ives noted widespread interest from US enterprises. Palantir has boasted swift AI system integrations and a broadening client base. Recently, the company won a $178 million deal to develop the US Army’s AI-driven targeting system, indicating extensive military usage ahead.

Moreover, investors appear to believe that PLTR stock remains undervalued, with robust growth and strong free cash flow suggesting it’s worth 30% more. Q4 2023 revenue surged 20% year-over-year, doubling since 2020, with a 26.70% annual growth rate. While government clients dominate the company’s overall portfolio of business, Palantir’s CEO anticipates accelerated growth from the commercial sector, driven by its AI offerings.

In 2023, US commercial revenue surged by 36.40% to $457 million, with a 70% year-over-year increase in Q4 alone. Palantir’s rapid data integration capabilities and AI Program fuel this growth. CEO Alex Karp sees AIP as the company’s future, facilitating seamless integration with existing systems and other software platforms.

Palantir’s profitability has surged, with adjusted Q4 income from operations hitting $209.35 million, 34% of quarterly revenue. Notably, adjusted free cash flow reached $304.75 million, half of quarterly revenue, with a 32.8% margin for 2023. This places Palantir among the best software companies, with Microsoft’s (NASDAQ:MSFT) margins at 30% and Oracle’s (NYSE:ORCL) at 23.30%.

The Bear Case

In a bearish scenario, Palantir’s growth may suffer due to prolonged high inflation and interest rates, potentially reducing government spending on software. Enterprise IT budget constraints could slow commercial growth, with 10% annual revenue growth forecasted through 2030, and profit margins declining to around 10%. 

By 2030, revenue could reach $3.5 billion, with net income of $350 million. Palantir’s premium valuation might decline, with a forward price-earnings ratio reaching 15- to 20-times, estimating a valuation around $7 billion based on the company’s 2030 projected profit.

Analyst Parkev Tatevosian highlighted Palantir’s high valuation, with a price-earnings ratio of 279-times, amidst slowing revenue growth. Despite AI prowess, decelerating growth raises concerns. 

With a current market capitalization of $49.8 billion, Palantir’s stock might decline by over 80% in a worst-case scenario. While I’m not sure this is possible due to the company’s sustained healthy free cash flow, a prolonged economic downturn and reduced momentum in commercial and government markets could dampen investor sentiment. 

Although analysts expected profitability in 2023, the stock’s high valuation doesn’t attract much in the way of long-term investor interest. Lower prices might warrant overlooking flaws, akin to buying a jacket with great features at a discount. However, at a premium, perfection is being priced in. While Palantir excels in AI and profitability, decelerating revenue growth deters investment at current valuations.

Investors Should Execute with Caution

Overall, I think investing in a company like Palantir really becomes a question of time horizon. This is an AI-related stock that’s likely to have more near-term momentum, should this sector’s tailwinds continue. However, over the medium- to longer-term, the question is whether Palantir can sustainably grow into its valuation multiples.

I’m of the view that new AI contracts from existing and new customers could drive continued profitability growth for some time. But I still do question this stock’s valuation.

So, I’m on the fence right now. While I think investors can remain cautiously optimistic, I’m a more cautious investor by nature. It’s really up to an investor’s risk tolerance and time horizon with this one.

On the date of publication, Chris MacDonald 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.