The S&P500 is considered the best overall benchmark of the U.S. stock market and consists of the nation’s 500 largest publicly traded companies. Given the reach of its member companies, it is considered the most reliable gauge of the overall performance of the stock market. To become part of the S&P 500, a company must meet the following conditions:
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Be a US-based company.
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Have a market capitalization of at least $8.2 billion.
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Be very fluid.
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Have at least 50% of the outstanding shares available for trading.
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Be profitable under GAAP in the most recent quarter.
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Be profitable over the previous four quarters in total.
Palantir Technologies (NYSE:PLTR) is one of the most recent additions to the S&P 500, joining the list on September 23. It is also one of only eleven companies to achieve this score so far this year. Since the arrival of generative AI in early 2023, Palantir shares have risen 575%, with gains fueled by robust revenue and profit growth.
Even after gains of that magnitude, some on Wall Street believe there is more to come. Let’s take a look at what drove the stock higher and whether the high price simply made it too risky.
AI solutions for the masses
Palantir has made a name for itself serving the US intelligence and law enforcement communities. The company’s unique algorithms could sift through mountains of data and connect seemingly disparate pieces of information to track down potential terrorists.
In recent years, Palantir has applied its advanced algorithms to give companies a competitive advantage by providing actionable business intelligence. Thanks in part to decades of experience, the company quickly recognized the opportunities presented by generative AI and developed timely solutions to meet the need. Palantir’s Artificial Intelligence Platform (AIP) emerged from these efforts. By leveraging existing business data, AIP can provide companies with solutions tailored to specific needs.
The proof is in the pudding
Palantir’s go-to-market strategy for AIP has helped the company differentiate itself. The company offers bootcamps that pair customers with Palantir engineers to help them create solutions to their unique challenges. This strategy has proven to be extremely successful.
Just last month, Palantir announced a new multi-year, multi-million dollar contract with Nebraska Medicine, which used AIP to improve healthcare through the use of technology. After what it describes as “a series of targeted boot camps,” the healthcare system was able to implement a new workflow that resulted in a more than 2,000% increase in discharge lounge utilization, freeing up beds earlier and reducing the time it takes to defecate was shortened. a patient with one hour (on average).
This is just one example of dozens of customer testimonials showing that AIP saves customers time and money, which in turn improves Palantir’s financial results. In the second quarter, it closed 96 deals worth at least $1 million. Of those, 33 were worth $5 million or more, while 27 were worth at least $10 million. Furthermore, many of these deals were closed within just a few weeks of a successful bootcamp session.
Taking a step back illustrates the impact on the company’s overall results. In the second quarter, Palantir’s revenue grew 27% year over year to $678 million, while revenue also rose 7% quarter over quarter. This was also the seventh consecutive quarter in which the company made a profit. Consistent profitability was the final hurdle needed to secure entry into the S&P 500. Additionally, fueled by AIP’s success, Palantir’s U.S. commercial revenues grew 55% year over year, while the segment’s customer base grew 83%. Even more impressive was the segment’s residual deal revenue (RDV), which rose 103%. When RDV grows faster than revenue, it shows that future revenue growth is accelerating.
Most experts suggest that this is still the early days for AI software adoption. At Ark Invest Big Ideas 2024Cathie Wood calculates that the opportunity for generative AI software could reach $13 trillion by 2030. The bull case is even more striking: $37 trillion.
Given Palantir’s unique perspective on AI implementation and the scope of the opportunity, it is clear that the company can continue to thrive in an increasingly AI-centric world.
Wall Street’s biggest Palantir bull
I’m not the only one who thinks this way. After joining the S&P 500, Greentech Research analyst Hilary Kramer stated that Palantir could “easily” be a $100 stock. That represents a potential upside of 130% compared to Monday’s closing price.
Kramer believes that given the company’s strong sales and earnings growth and growing backlog, investment banks will eventually have to come on board and raise their estimates, which will lead to others taking a look at the stock, which will be a virtuous cycle will initiate.
Despite its vast potential and excellent execution, some investors may be put off by Palantir’s frothy valuation. The stock is currently selling for 122 times expected earnings and 29 times expected revenue. However, if we use the price-to-earnings-growth ratio (PEG) – which takes into account the company’s impressive growth rate – the price comes to 0.4, while any figure less than 1 indicates an undervalued stock.
In a case like this, where valuation is a sticking point, dollar-cost averaging allows investors to get into stocks over time and pick up more shares when the price is more reasonable.
Make no mistake: Palantir is positioned to benefit from the AI revolution. Investors who fancy a bit of volatility and a bit more risk should consider a position in this breakthrough AI stock.
Don’t miss this second chance at a potentially lucrative opportunity
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*Stock Advisor returns October 14, 2024
Danny Vena holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Meet the newest addition to the S&P 500. The stock is up 575% since the start of last year and it’s still a buy, according to 1 Wall Street analyst, originally published by The Motley Fool
