Palantir Technologies (PLTR 6.22%) has been one of the hottest stocks on the market in recent months. Shares have advanced 320% year to date as of Dec. 5 due to enthusiasm surrounding artificial intelligence (AI). That makes Palantir the best-performing member of the S&P 500 (SNPINDEX: ^GSPC) this year.

The company is currently worth $165 billion, but Dan Ives at Wedbush Securities thinks "Palantir could be the next Oracle." That statement may have caught the attention of more investors had Ives chosen (for lack of a better word) a trendier comparison, but the implications are still enormous for shareholders.

Oracle is a $500 billion company (200% more than Palantir), with a strong presence in several enterprise-software verticals, including analytics and business intelligence platforms. Ives does not expect Palantir shares to surge 200% in the next 12 months but instead thinks the company can grow into that valuation over the next three to four years.

What makes that call particularly surprising is that most pundits are still skeptical about Palantir. Among the 20 analysts following the company, the stock has a median target price of $38 per share. That implies 47% downside from its current share price of $72.

Here's what investors should know about Palantir.

Palantir has become one of the largest players in the AI platforms market

Palantir helps commercial and government organizations make sense of complex data. Its core products, Gotham and Foundry, let clients integrate information and machine learning (ML) models into analytical applications. And its AI platform AIP adds support for large language models and generative AI to its core software products.

In August, Forrester Research recognized the company as a leader in AI/ML platforms. The analysts wrote, "Palantir is quietly becoming one of the largest players in this market." And in September, Dresner Advisory Services listed Palantir as a top vendor in its 2024 market study on AI/ML and data science software.

That puts the company in a good position. The International Data Corp. (IDC) estimates that AI platform spending will increase at 41% annually through 2028. Meanwhile, Grand View Research expects the data-analytics software market to grow at 27% annually through 2030.

Palantir reported another acceleration in sales growth in the third quarter

Palantir checked all the right boxes with its third-quarter financial report. The company beat expectations, raised full-year guidance, and provided encouraging insight into the business. Total revenue increased 30% to $725 million, the fifth-straight sequential acceleration, and non-GAAP net income soared 43% to $0.10 per diluted share.

Particularly important was the sales growth of 40% among U.S. government customers, an acceleration from 24% in Q2 and 12% in Q1. CFO Dave Glazer attributed the uptick to new contract awards that reflect growing demand for AI in government software. For example, Palantir recently won a $100 million deal that will expand its Maven Smart System for battlespace awareness to more U.S. military personnel.

Looking ahead, management now expects full-year revenue to increase 26%, which is 3 percentage points faster than what the company previously anticipated. However, that forecast implies revenue will grow 26% in Q4, which would be a deceleration from 30% in Q3.

Image source: Getty Images.

Dan Ives says Palantir may be the best pure play AI stock

Palantir should benefit as organizations across the commercial and government sectors use AI analytics to improve labor productivity and operational efficiency. But the valuation is rather worrisome. Wall Street expects adjusted earnings to increase at 25% annually through 2027, which makes the current price-to-earnings (P/E) ratio of 205 look absurdly expensive.

Wedbush analyst Dan Ives thinks Wall Street is underestimating how much Palantir will benefit as demand for AI software increases. He estimates earnings could grow 15% to 20% faster than analysts anticipate. But the current valuation still looks unreasonable even in that scenario. Indeed, Gil Luria at D.A. Davidson recently said Palantir trades at "an unprecedented premium" to other software companies.

Ives seems unconcerned by the valuation, but he also sees very little near-term upside. Despite saying Palantir may be the next Oracle, and once referring to the stock as "probably the best pure play AI name," Ives' 12-month target price of $75 per share implies just 4% upside from the current share price of $72.

Personally, I think investors should avoid this stock right now. Palantir is executing well on what promises to be a massive market opportunity, but the present valuation appears to be disconnected from business fundamentals. My opinion may cause regret in the near term if Palantir shares keep moving higher, but I think investors will have the chance to buy at a far cheaper price in the future.