Given the stock’s parabolic rise, some investors are leery of Palantir’s high valuation. However, one Wall Street analyst believes this is just the beginning. Let’s take a look at what fueled Palantir’s epic success, and whether there are more opportunities for growth.
Palantir has been developing advanced AI solutions for more than twenty years. The company has made its mark inventing cutting-edge algorithms to benefit the U.S. intelligence, military, and law enforcement communities. The systems developed the uncanny ability to connect seemingly unrelated data to foil terrorist plots and bring offenders to justice.
The company has grown beyond its humble roots and brought the same data mining know-how to the business world. Palantir’s AI and analytics systems crunch data and provide companies with solutions to real-world problems.
When companies started clamoring for actionable AI last year, Palantir quickly developed its Artificial Intelligence Platform (AIP), a generative AI system that provided data-driven answers. The system uses company-specific data to develop customized solutions.
One of the main hurdles to AI adoption is that most companies don’t have the expertise to get started with it. Palantir developed a go-to-market strategy that takes this issue off the table. The company hosted bootcamp sessions that paired customer representatives with Palantir engineers to ensure they developed the AI solutions they needed. This strategy has proven to be more successful than the company’s wildest dreams.
Palantir’s quarterly report is full of customer testimonials detailing their success stories with AIP, and the evidence is clear. In the third quarter, Palantir closed 104 deals worth at least $1 million. Of those, 36 were worth $5 million or more, while 16 were worth at least $10 million. The company said many of these agreements were made within weeks of the customer attending a bootcamp session.
Palantir’s overall results paint a compelling picture. Revenue grew 30% year-over-year to $726 million, while revenue also increased 7% quarter-over-quarter. This also marked the company’s eighth consecutive quarter of profitability, a streak that contributed to its acceptance into the S&P 500.
Perhaps more telling, Palantir’s US commercial revenues, including AIP, grew 54% year over year, while its customer base grew 77%. This helped the segment’s residual deal value (RDV) increase by 73%. When RDV grows faster than revenue, it provides insight into the company’s future prospects, which are improving rapidly. It also shows that Palantir is quickly moving beyond its dependence on government contracts.
While there is no consensus on the total addressable market for generative AI, the size of the estimates can be instructive. At Ark Invest Big Ideas 2024Cathie Wood concludes that the AI software market could grow to $13 trillion by 2030. The bull case is even more staggering: $37 trillion. Given Palantir’s expertise in this area and its success in helping customers implement AI solutions, it’s clear that the company still has a long road ahead.
Palantir’s high valuation is undeniable, dividing Wall Street. Of the 19 analysts covering the stock in October, six rated it a buy or strong buy, seven rated it a hold, and the remaining six rated it underperform or sell. What is almost universal among bears are concerns about their valuation, but appearances can be deceiving.
The stock is currently selling for 160 times future earnings and 40 times next year’s sales. However, the price-to-earnings-growth ratio (PEG) – which takes into account Palantir’s accelerating growth – comes in at 0.5, while any number less than 1 is the norm for an undervalued stock.
I’m not the only one who believes the stock is still a buy. Following its admission to the S&P 500, Greentech Research analyst Hilary Kramer opined that Palantir could “easily” be a $100 stock.” That represents a potential gain for investors of 65% compared to Wednesday’s closing price.
The analyst cites Palantir’s robust and accelerating revenue and earnings growth and growing backlog as a catalyst for a stock revaluation.
For investors still convinced that Palantir is too expensive, dollar-cost averaging provides a mechanism to build a position over time, adding more shares as the multiple becomes more attractive.
To be clear: Palantir Technologies does not fit every portfolio. However, for those with an appropriate investment horizon – and a rock-solid constitution – Palantir is tapping into a huge opportunity within the AI ecosystem that could be extremely profitable for investors.
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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 845% since the start of last year and it’s still a buy, according to a Wall Street analyst. was originally published by The Motley Fool
