The increased interest of investors in all things Artificial Intelligence (AI) has helped generate huge returns for various associated stocks and has contributed immensely to the performance of the current bull market. The investment spark that AI advancements have brought about has likely helped improve the overall economy as well.
The U.S. economy is showing signs of strength these days, but also some signs of weakness, leading some to wonder if a recession is possible. If a recession does come, many stocks are likely to take a hit, including the technology sector and the AI ​​stocks that currently dominate the sector. Economic downturns often send investors scrambling to find recession-proof stocks to hold while they wait for better times. Investors interested in AI stocks will be hard-pressed to find recession-proof options. And yet, they do exist.
The secret is finding recession-proof companies that benefit from a stable level of activity, even during recessions. One such company worth considering is Palantir Technologies (NYSE: PLTR).
Why Palantir?
Palantir began by providing software and analytics services to the national security sector. Regardless of the broader economy, the need for national security and related services does not change. The military and intelligence community rely on analytics insights at all times, not just when things are going well.
As Palantir expanded its operations, it began offering its AI-related analytics services to the commercial sector. At first glance, this may not seem recession-proof. After all, businesses can go bankrupt or run into trouble and have to cut non-essential services. Palantir’s saving grace is that what it offers is becoming essential to many businesses that are looking to cut costs elsewhere first.
For example, Palantir’s Artificial Intelligence Platform (AIP) can be used to analyze a company’s operations to determine where it can save money. This generative AI platform can potentially be used at any stage of the business cycle. However, that need is especially acute when a recession hits and companies need insights on how to be more efficient.
Palantir has held boot camps for potential customers to better demonstrate how the software can be used. The productivity gains that companies are discovering are astounding. One insurance broker reported using AIP to automate policy review cases, while a grocery chain applied it to inventory management and price optimization. The boot camps effectively demonstrate why AIP is indispensable, regardless of the economic conditions.
How Palantir Performs Financially
Palantir generated revenue of more than $1.3 billion in the first six months of 2024, an increase of 24% compared to the previous year.
Gross margins are huge in this industry, at 81%. Operating expenses are stabilizing (up just 6% in the first half of the year), allowing Palantir to report $240 million in net income attributable to shareholders (up from $45 million in the same period last year).
Palantir’s growth rate remains steady, with revenue forecasted at $2.75 billion, up 23%. That optimism has led to the stock roughly doubling in value over the past year. Given the productivity gains that AIP offers, you have to wonder if that revenue growth won’t accelerate over time.
Unfortunately, that optimism also drove the stock’s price-to-sales (P/S) ratio to 32. In the short term, that kind of valuation leaves Palantir shares vulnerable to a sell-off if market sentiment or the company’s challenges spook shareholders. Over the long term, though, the company’s strength should support the stock regardless of the state of the economy.
Palantir as a recession-proof AI stock
Palantir is one of the few AI stocks that is likely to be minimally affected by economic cycles. Granted, the stock isn’t immune to downturns, and shareholders could take a short-term hit if traders focus on the broader market and hit highly valued stocks. That suggests investors may want to wait for a pullback or signs of accelerated growth before buying Palantir stock or buying more Palantir shares.
However, Palantir’s recession-resistant nature likely means that demand for its services will remain constant or perhaps even increase in an economic downturn. On the commercial side of the business, AI has brought its clients huge productivity gains and financial savings, making its services and capabilities attractive regardless of the state of the economy.
While the near-term outlook for the stock is more uncertain, Palantir’s growth as a company should drive share price growth over the long term, regardless of economic headwinds.
Should You Invest $1,000 in Palantir Technologies Now?
Before you buy shares in Palantir Technologies, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $652,404!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of September 9, 2024
Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Opinion: This Artificial Intelligence (AI) Stock Is Recession-Proof was originally published by The Motley Fool
