Analysts want to hit pause on Palantir Technologies (NASDAQ:PLTR) stock, saying the software as a service company is overbought as an artificial intelligence play.

Since four analysts downgraded PLTR stock around June 16 they’re down 15%, trading June 22 around $14. The price remains generous. The company had $1.9 billion in sales last year but has a market cap near $30 billion.

The question for investors becomes, is now the time to buy the dip?

Why Buy PLTR Stock?

Palantir CEO Alex Karp insists his company has the lead in AI software and no plans to relinquish it.

An open letter urging AI development be paused on ethical grounds drew his particular disdain. He sees AI as literally an arms race, noting the company’s support for Ukraine and the U.S. military. “The race is on. There’s only a question of do we stay ahead or do we cede the lead.”

While Palantir is best known for its military contracts, it’s also trying to win commercial customers. It has launched its Foundry platform for manufacturers on the Amazon (NASDAQ:AMZN) AWS cloud.

Palantir says 10% of U.S. revenue now comes from hospitals, using its data analytics to track demand and performance, applications formerly done using phones and whiteboards. 

This success illustrates a common misconception about AI, driven by programs like ChatGPT. The market today isn’t in replacing writers for scriptwriting or stories like this. The market lies in analyzing existing data to find and implement productivity improvements.

Buy Palantir Now?

It’s true, however, that “generative AI” solutions like ChatGPT have created a dot com like mania in AI stocks. Those analysts downgrading the shares don’t deny the market opportunity or Palantir’s lead. They’re saying the 60% gain since its earnings report in May is overdone.

Palantir reported its first positive earnings under GAAP during the quarter, but it was just $17 million, $4 million from operations, and 1 cent/share. Revenue was $525 million, up 18% year over year. Commercial revenue was up just 15%. For all of 2023, the company expects revenue of about $2.2 billion. That’s not worth $30 billion, in their view.

What is it worth? That depends on your time horizon. Bulls see enormous interest in Palantir’s newly announced Palantir Artificial Intelligence Platform. The company hopes to capture 20% of cost savings produced by the platform and, in the hospital segment, it seems to be delivering.

The danger here lies in Palantir’s efforts to turn its defense work into commercial work. Karp and his lieutenants see growing defense spending as a good thing for them. But it creates pushback on the commercial side, as with its work for England’s National Health Service. Not everyone wants to get in bed with a defense contractor.

My own problem with PLTR stock is that the company’s software is proprietary. Proprietary software often takes an early lead in new markets. But over time, open source builds higher, rising platforms.

Open source built the onternet, not proprietary software. Companies that resisted the model, like Microsoft (NASDAQ:MSFT), have been won over to the system.

The Bottom Line

Most companies in AI today have a development or marketing challenge.

Palantir has a management challenge.

Scaling software and locking-in customers can build fortunes, as Oracle (NASDAQ:ORCL) has proven. But it doesn’t guarantee industry leadership. Defense contractors often have difficulty moving to the commercial realm, because their regulatory costs and the resulting pricing turns off many enterprises.

PLTR stock may prove the doubters wrong. The recent pricing action may just be a pause that refreshes the stock and moves it higher. But nothing goes directly “to the Moon.” Palantir’s valuation, based on its revenue and profits, is already there.

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