The excitement around artificial intelligence (AI) cannot be underestimated. Technology stocks in particular soared in 2023, boosting the economy Nasdaq Composite by 43%.
Last year, a small group of mega-cap tech companies, collectively called the “Magnificent Seven,” played a major role in boosting the markets. However, a number of other opportunities are emerging outside of big tech as the AI revolution continues.
Shares of Palantir Technologies (NYSE:PLTR) up 167% last year. Additionally, Palantir shares rose 36% this year before reporting first-quarter results on May 6.
But since the company’s earnings report in early May, Palantir shares have fallen 18%.
Is Now the Time to Buy the Dip, or Could Palantir Be a Falling Knife? Let’s take a look at the stock price volatility and assess the company’s earnings report.
A quick look at the stock movement
The chart below illustrates the movements in Palantir’s stock price over the two weeks leading up to its first quarter earnings report.
While 11% may not seem like much, this is quite a dramatic move in a short time frame. To put it in perspective, the entire Nasdaq index is up just 4.6% over the same period. Moreover, from January 1 to May 3, the Nasdaq rose 7.6%.
Considering that Palantir stock has outperformed the Nasdaq performance in just two weeks this year, this suggests something deeper.
Sometimes a share will show some momentum before an earnings report is released. While there are many reasons for this, I would say that this excessive trading activity is usually not justified.
Additionally, momentum stocks often come with risks because day traders can enter and exit a position in the blink of an eye.
Expectations are sky high
Last year, the stock market was strongly influenced by splashy investments that technology companies made in AI. In other words, much of the AI story was priced into software stocks in particular – even though many of these companies still had a lot to show for their AI investments.
In April 2023, Palantir released its fourth major software product: the Palantir Artificial Intelligence Platform (AIP). Since its release, Palantir has sparked a new wave of customer acquisition that has led to impressive revenue growth.
There is a lot of hype around AIP and Palantir has proven that it can compete at a high level with big tech. Furthermore, given that less than 50% of Palantir stock is owned by large institutions, I think it’s clear that the company has become a fan favorite among the retail investing community.
Palantir continues to move the ball forward across its business. For the quarter ended March 31, Palantir increased revenue 21% year over year to $634 million.
Additionally, the company expanded its operating margin from 24% in the first quarter of 2023 to 36% at the end of the first quarter of this year. The combination of rising revenue and rapidly growing margins has resulted in consistently positive net income and free cash flow for Palantir.
Despite these positive indicators, Palantir shares have fallen sharply and remain at low prices. Excitement about the company’s advances in AI led to a short-lived period of increased buying activity. However, investor expectations are now at a level that does not match reality.
Frankly, Palantir’s current price action is showing signs more like a meme stock right now.
Is Now a Good Time to Invest in Palantir Stock?
Despite some of the stock’s idiosyncratic characteristics, I see many reasons to invest in Palantir.
AIP has proven to be a new source of growth for Palantir, especially in the private sector. During the first quarter, the number of commercial customers in the US increased 69% year over year. Moreover, the company is making strides with big technology in terms of strategic alliances.
Palantir recently teamed up with Oracle to bring the data load to Oracle’s cloud infrastructure. I consider this a lucrative lead generation source, and one that has yet to be recognized in Palantir’s current results.
With a price-to-sales ratio (P/S) of 20.7, Palantir’s stock trades at a premium to many of its peers in the enterprise software space and even several major tech AI companies. While this shows that Palantir stock isn’t dirt cheap, the trends in the chart above illustrate that Palantir’s valuation multiples have become more normalized thanks to the selloff.
Even though Palantir stock is a bit pricey, I would still consider picking up shares. The company has made measurable progress over the past year, and with rising revenue and profits, Palantir represents a unique opportunity for fast-growing AI software companies.
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Adam Spatacco has positions at Microsoft and Palantir Technologies. The Motley Fool holds positions in and recommends Datadog, Microsoft, MongoDB, Oracle, Palantir Technologies, Salesforce, ServiceNow, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Palantir stock is cratering, but the reason it might surprise you (Hint: It’s not because of the artificial intelligence competition) was originally published by The Motley Fool
