Palantir Technologies (NYSE:PLTR) took Reddit by storm last year. Palantir launched its direct listing in late 2020 with its shares priced around $9 each. However, investors associated with WallStreetBets drove the price of PLTR stock up to $35.

It was an incredible valuation, well north of $60 billion, for the secretive artificial intelligence (AI) firm. Since then, cooler heads have prevailed, and Palantir’s shares have returned to a far more reasonable price. Even so, PLTR stock is hardly a slam-dunk buy. Here are the catalysts that have driven Palantir’s recent growth, and its outlook following its disappointing earnings report yesterday.

Palantir’s Core Value Proposition

Originally, Palantir emphasized security and counterterrorism functions. The company built a reputation as the AI provider for spy agencies and the Department of Defense. It grew rapidly in the wake of 9/11 as intelligence agencies beefed up their cybersecurity capabilities in an effort to prevent other such atrocities. And Palantir is still benefiting to a certain extent from Washington’s emphasis on cybersecurity.

However, the company is much more than that now, as Palantir used its crime-fighting capabilities to pivot to combating fraud and money laundering in the banking system. Then it began working for commercial enterprises also.

Nowadays Palantir seeks to assist companies in a wide range of industries with analyzing complex data. Palantir isn’t just a data-mining firm; it helps human analysts in general. More specifically, if people are working to solve a certain problem, Palantir can sort through millions of columns of data and identify patterns and tendencies that a human analyst might want to further investigate.

Palantir has recently put its platform to work in the health care industry, as it has improved governments’ responses to Covid-19. The company’s ability to scan through reams of data and highlight interesting patterns is invaluable. Subsequently, doctors and biologists can analyze and investigate Palantir’s findings more fully.

In other words, the company has an interesting hybrid model that pairs AI with human expertise. It contrasts starkly with, for example, IBM’s (NYSE:IBM) Watson AI system, which is almost entirely reliant on machine learning. While Watson is great at winning chess matches and game shows, it has been less successful as a tool for companies than Palantir’s model so far.

Palantir Faces More Competition in the Private Sector

Palantir has established a strong niche supporting governments’ defense, intelligence, and anti-crime efforts. However, Palantir is now also helping businesses in a variety of areas, such as health care and supply chain management.

In these fields, Palantir faces more intense competition from other firms that have been ramping up their AI capabilities to address these problems. Investors should not expect Palantir’s private-sector business to grow as quickly as its government operations did.

In addition, Palantir doesn’t quite have the defense sector to itself, either. For example, C3.ai (NYSE:AI) recently announced a $500 million contract with the Department of Defense, validating that firm’s expansion from its core industrial AI market into other fields, such as security. Despite this huge contract, AI stock is down about 85% from its 52-week highs, and the cash on its balance sheet is now equal to 40% of its market capitalization. And that brings me to the next point.

Palantir’s Valuation Is Still a Major Issue

Palantir’s shares certainly aren’t as expensive as they were a few months ago. Still, now trading around $12, Palantir has a market capitalization of more than $24 billion. Don’t let the low share price fool you; the valuation of PLTR stock is still high.

The company’s 2021 revenue came in at about $2 billion, meaning that the shares are changing hands for 12 times its 2021 sales. Excluding certain items, most notably its large amount of stock-based compensation, the company has reached profitability and cash flow positive status.

But Palantir is not very profitable, even with those exclusions. In particular, its Q4 adjusted earnings per share of 2 cents was well short of analysts’ average outlook. And the company’s forward guidance was not very impressive either. So investors are paying a rather high price for Palantir, even now, especially compared to its more beaten up rivals in the software-as-a-service space.

The Verdict on PLTR Stock

Some traders had been hoping that Palantir’s Q4 earnings would be a turning point for it. However, it appears that won’t be the case, as its shares tumbled over 15% yesterday in the wake of its results.

Palantir continues to report solid revenue growth, but it will need to improve its profitability and cash flows to really draw long-term investors back into the name.

Palantir is still trading at a lofty valuation, probably due to its connections with intelligence agencies and its former status as a meme stock. However, given how much other AI stocks like C3.ai have tumbled, it’s hard to justify Palantir’s current price-sales ratio.

On the date of publication, Ian Bezek held long positions in AI and IBM stocks. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a sizable New York City-based hedge fund. You can reach him on Twitter at @irbezek.