Shares of data mining and artificial intelligence (AI) specialist Palantir Technologies (NYSE: PLTR) have increased by an impressive 47% so far in 2024.
Palantir beat consensus revenue expectations and met adjusted earnings per share estimates in the first quarter of 2024. Despite the stunning numbers, the stock tumbled nearly 15% following the quarterly results release, as investors were disappointed with the company’s conservative revenue guidance for full fiscal 2024.
Palantir has since recovered most of its losses, largely driven by recent profit-taking in semiconductor/AI stocks and market rotation from semiconductors to software stocks. But there’s still a lot to like about this software-as-a-service (SaaS) player known for its exceptional ability to mine mountains of government and corporate data for actionable insights.
Here are three reasons why investors should take a stake in Palantir now.
1. Unleashing the power of AI
Since its launch, Palantir’s large language model-driven Artificial Intelligence Platform (AIP) has seen solid customer adoption. By leveraging data analytics and machine learning, AIP helps companies “go beyond chat” and effectively deploy AI solutions to drive real business value.
Palantir’s AIP applies ontology and data integration technologies to enable customers to implement AI solutions even with messy underlying data. AIP helps transform unstructured data—including emails, Slack messages, PDFs, comments, audio, and images—into structured actions and outputs. This contrasts with competitors who claim that only 10% of a customer’s data is AI-ready.
Palantir’s bootcamp-based go-to-market strategy is also proving successful, with more than 900 organizations having participated in the bootcamps by the end of Q1. The company also rolled out Build with AIP (tutorials and reference implementations) to help customers effectively use AIP to build AI solutions. AIP then helps Palantir win new customers and expand with existing customers.
Strong US commercial activity and renewed growth in government activities
The US commercial business was undoubtedly the star performer for Palantir in the first quarter, with revenue growing 68% year-over-year, excluding strategic investments. This trend is expected to continue in 2024, driven primarily by increasing adoption of the company’s AIP platform. Palantir recorded a robust 69% year-over-year growth in US commercial customers in the first quarter. Not surprisingly, the company has raised its full fiscal 2024 growth outlook for this customer base to 45% from its previous estimate of 40%.
Palantir’s U.S. government business also showed strength, with revenue growing 8% year-over-year in the first quarter, up from 3% year-over-year growth in the previous quarter. The company received more than $178 million from the U.S. military for a project under the Tactical Intelligence Targeting Access Node (or TITAN) program, which will help the military detect enemy targets.
The project has made the company the first software company to receive a prime contract (a direct contract with a government agency) for a hardware manufacturing project. By positioning itself as a “software prime,” Palantir may see even more opportunities in the U.S. defense sector.
Government business involves significant vendor vetting and is inherently sticky. While this business is growing more slowly than the commercial business, it provides Palantir with a stable revenue base. Furthermore, in the current era of geopolitical tensions, Palantir’s government-focused software solutions have become even more relevant and are poised to experience robust growth in the coming years.
Impressive finances
Investor reaction to Palantir’s fiscal 2024 revenue guidance appears short-sighted, as the company’s topline growth is likely to be bumpy in the early stages of its ongoing AI transformation. The company’s financial performance is becoming increasingly predictable as AI technologies advance and gain acceptance globally.
Nevertheless, Palantir’s profitability has steadily improved. The company posted net income of $106 million under generally accepted accounting principles (GAAP) in the first quarter, marking its sixth consecutive quarter of GAAP profitability. The company also reported GAAP operating income of $81 million and an adjusted operating margin of 36%. Palantir’s Rule of 40 score (an indicator of the company’s revenue and earnings performance) also rose to 57 in the first quarter of 2024, up from 54 in the fourth quarter of 2023.
Palantir is also generating cash at a robust pace. The company reported $130 million in cash from operations and $149 million in adjusted free cash flow in the first quarter. It ended the first quarter with $3.9 billion in cash, a source that gives it ample financial flexibility to invest in growth initiatives.
Palantir stock trades at 24 times trailing-12-month revenue and isn’t cheap. However, the premium valuation seems justified given the mission-critical nature of the software across multiple government operations and the fast-growing commercial sector. That’s why it makes sense to invest in this high-flying stock now.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
3 Reasons to Buy Palantir Like There’s No Tomorrow was originally published by The Motley Fool
