Palantir Technologies(NYSE:PLTR) stock is a tech stock most closely associated with the Trump administration.

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Thats unfair. While co-founder Peter Thiel is a big fan of President Donald Trump, the business is designed to thrive in any political environment.

The questions investors should ask are, what is the nature of the business, how big can it get, and what is that worth?

The answers are that Palantir (the name comes from the all-seeing stone inThe Lord of the Rings) is a data analysis firm with proprietary software, but that its not worth what people are paying for it.

In its S-1, Palantir claimed a total addressable market of $119 billion.

The companys market cap is nearly $49 billion. Based on the first three quarters of 2020, Palantir should do $1 billion in business this year. That means investors are already paying 49x revenue and 41% of its addressable market for the shares.

Thats too high. Especially as employees rushed for the exits when the stock was at $10. There are still shares subject to a lock-up that expires in March.

Palantirs business is to turn huge masses of government data into simple, actionable charts and graphs. While critics focus on Thiel, Trump, and contracts with the Department of Defense and U.S. Immigration and Customs Enforcement (ICE), thats not all of it. The stock rose sharply on a (relatively small) Food and Drug Administration contract, assessing safety data on drugs and other medical products. Palantir claims half its addressable market will be work done for the private sector.

Despite liberal qualms (and Im a liberal) there is a huge need for what Palantir does. Government and industry are collecting data theyre getting no knowledge from. This data is often stored in insecure systems, accessible by bad actors. Having a James Bond in this new cyberworld is essential. Thats what Palantir promises to be.

As essential as Palantirs work may be, however, there are limits to the valuation that can be placed on the stock. Palantir is spending money as fast as it comes in. Operating cash flow was negative in the last quarter. Losses have exceeded total revenue for the year.

Some of that loss comes from ramping up operations. Some comes from the costs of going public. But Palantir has also limited its addressable market, quite deliberately. Its not interested in working for those it deems bad guys or American adversaries. It will remain closely tied to U.S. government interests, regardless of the party in power.

Thiels politics may limit Palantirs growth under Biden, but I think those fears are overblown. The real limits to Palantir are its own choices on who to work with, the necessary secrecy deriving from that work, and the real quality of its software, which is inherently unknown.

In the end, Palantir is a black box. Its strengths and weaknesses are nearly unknowable. Its work is essential, but the value of that work is unknown.

Investors are being told to take the 10% fall in the stock during December as a gift, a reason to buy more shares. But investors buy government contractors for income, not as speculations. Thats because their markets are naturally limited by government secrecy, a world Palantir has embraced.

Palantir currently enjoys a cloud application valuation with a business which, at best, might turn out to be more likeLockheed Martin(NYSE:LMT). When you choose to work only for good guys, your growth is self-limited, no matter how good your black box is.

Once investors recognize that, they will see Palantir stock is overvalued.

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

Dana Blankenhornhas been a financial and technology journalist since 1978. He is the author of theenvironmental thrillerBridget OFlynn and the Bear,availableat the Amazon Kindle store. Write him atdanablankenhorn@gmail.comor follow him on Twitter at@danablankenhorn.

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Palantir Technologies Looks to be Overvalued Now - InvestorPlace