The index announced its annual rebalancing on December 13 after market close. Palantir Technologies (NASDAQ:PLTR) was selected to join the Nasdaq-100, “which will be in effect before the market opens on Monday, December 23.” Since generative artificial intelligence (AI) went viral early last year, Palantir shares have risen 1,090%. Its decades of experience with AI made it the choice for AI solutions, likely facilitating its inclusion in the index.
After the recent surge, some investors are reluctant to buy the stock, especially given its frothy valuation. One Wall Street analyst believes this view is shortsighted. Let’s examine the circumstances behind Palantir’s recent parabolic rise and see if more upside lies ahead.
Palantir was born from the rubble of September 11, with the idea that the right AI algorithms could piece together seemingly disconnected pieces of information that would expose a terrorist plot before it could materialize. The company quickly gained a following among the U.S. intelligence community and our allies, and military and law enforcement agencies quickly adopted its solutions.
Over time, the company expanded its offerings to bring its data mining, analytics and AI know-how to enterprise customers and provide data-driven solutions. The arrival of AI at the beginning of last year brought customers en masse looking for solutions. Palantir quickly developed a multi-function tool to answer the call. The Artificial Intelligence Platform (AIP) was the fruit of his labor. By connecting AI to a company’s operational data, AIP can provide real-time, business-specific solutions to real-world problems.
To close the knowledge gap at most companies, Palantir has created boot camps where customers work one-on-one with Palantir engineers to develop these customized solutions. As Palantir’s financial results show, this removes the most common hurdle for companies looking to adopt AI.
In the third quarter, Palantir generated revenue of $726 million, which grew 30% year over year and 7% sequentially. At the same time, earnings per share (EPS) rose 100% from $0.06, marking the eighth consecutive quarter of profitability. As impressive as that is, it only tells part of the story.
Palantir’s US commercial segment, which comprises a large portion of AIP revenue, grew 54% year over year, increasing residual deal value (similar to order book) by 73%. When the backlog grows faster than revenue, it provides insight into future potential, which is improving rapidly. The segment’s customer base also soared, up 77%.
Let’s not forget Palantir’s fundamental government revenues, which grew 40% year over year and 15% quarter over quarter.
Another important indicator is the increasing number of contracts that the company signs. In the third quarter, Palantir signed 104 deals worth at least $1 million. This included 36 deals worth $5 million or more and 16 worth at least $10 million. Tellingly, many of these agreements were reached just weeks after a customer attended one of Palantir’s bootcamps.
The company has likely only scratched the surface of the tidal wave of demand. According to global management consulting firm McKinsey & Company, the generative AI market is expected to be worth between $2.6 trillion and $4.4 trillion over the next decade. Palantir is well positioned to benefit from this strong secular tailwind.
While there’s little doubt that Palantir has a bright future, some investors fear the stock has gotten ahead of itself, and Wall Street seems to agree. Of the 20 analysts who gave their opinions in December, only four rate it a buy or strong buy, nine rate it a hold, and the remaining seven rate it underperform or sell. Those who are bearish on the stock almost universally cite the valuation as the catalyst for their dowry prospects.
The figures seem to support that picture. The stock is currently selling for 380 times earnings and 69 times sales, both of which are egregious by any measure. However, the most commonly used metrics fall far short when evaluating a fast-growing company. For example, Palantir’s price-to-earnings-growth ratio (PEG) – which takes into account the company’s accelerating growth – is 0.63, while any number less than 1 is the norm for an undervalued stock.
Wedbush veteran technology analyst Dan Ives remains bullish, maintaining an outperform (buy) rating on Palantir with a $75 price target, although the stock recently eclipsed that target. The analyst spoke of “increased confidence in the groundbreaking AIP strategy, with AI use cases set to take hold over the next 12 to 18 months.” He went on to say that Palantir will see “unprecedented demand” as more companies adopt and expand the use of the company’s AI solutions.
Furthermore, although Palantir currently has a market cap of roughly $172 billion, Ives believes Palantir could be “the next Oracle.” Datum Oracle‘s market cap of $494 billion, suggesting a potential upside of 188% for Palantir. Although that is a bold statement, it illustrates the opportunities that exist. To be clear, it will take some time for this vision to become a reality.
I am not unsympathetic to the conundrum posed by the conflicting views. For those who still feel Palantir is overpriced, one strategy is to buy a small position that won’t break the bank and replenish it the next time the stock takes a nosedive — which it undoubtedly will to happen. Another is the use of dollar-cost averaging, which involves purchasing fixed dollar amounts of stock at certain intervals, resulting in a lower average cost.
Palantir Technologies won’t appeal to every investor. However, for those willing to take on some extra risk for potentially explosive profits, Palantir is at the intersection of enormous opportunities that could yield a highly profitable investment.
Consider the following before purchasing shares in Palantir Technologies:
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Danny Vena holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Oracle and Palantir Technologies. The Motley Fool has a disclosure policy.
The Nasdaq-100 just announced its newest addition. The stock is up 1,090% since the start of last year, and according to one Wall Street analyst, it’s still a buy heading into 2025. was originally published by The Motley Fool
