Analysts rarely see eye to eye on anything, but an astonishing number share a similar view on the data mining and artificial intelligence (AI) specialist.
The dawn of artificial intelligence (AI) in late 2022 caused a paradigm shift in technology that is still ongoing. The potential of generative AI to increase productivity and streamline processes has business leaders lining up to reap the rewards of this veritable financial windfall. But many executives simply don’t know where to start.
That’s where Palantir Technologies (PLTR -1.91%) comes into play. The company provides the systems and expertise to deliver real-time, data-driven solutions — and it’s hard to argue with the results. The stock has gained more than 415% over the past year (as of this writing) and is up 1,710% since AI went viral to kick off 2023. Unfortunately, the surging stock price has seen a commensurate increase in Palantir’s valuation, and some investors have become justifiably skittish.
Despite the nearly universal sticker shock, some believe that Palantir’s epic run is just getting started. Let’s review what’s fueling Palantir’s current success, what could drive the stock to new heights, and what Wall Street believes.
Image source: Getty Images.
An AI pioneer
While generative AI stole the spotlight in recent years, Palantir has a long and storied history of AI development. The company has worked behind the scenes for more than 20 years, developing sophisticated algorithms for U.S. intelligence agencies and law enforcement. Palantir was founded out of the rubble of 9/11 with the idea that an AI-powered system could pore over information from disparate systems, linking seemingly random data points that would act as a trail of breadcrumbs and stop potential terror plots in their tracks.
Palantir quickly concluded that its data analytics and AI systems would be equally adept at providing elegant solutions to otherwise complex business problems. By diving deeply into siloed enterprise systems, its software can provide actionable intelligence based on data-driven insights.
However, when generative AI burst on the scene, Palantir recognized the unprecedented opportunity. Just months later, the company introduced its Artificial Intelligence Platform (AIP), which leverages company-specific data to unearth individualized solutions.
However, it was the company’s go-to-market strategy that was pure gold. Most managers are eager to benefit from AI but simply don’t know where to start. Palantir engineers are paired with executives and developers at “boot camp” forums to solve real-world problems with AI. “These immersive, hands-on sessions allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations,” Palantir said.
The success of this strategy is undeniable. In the fourth quarter, Palatir’s revenue grew 36% year over year, while adjusted earnings per share (EPS) soared 75%. That’s just the tip of the iceberg. Palantir’s U.S. commercial revenue — which includes AIP — rose 64%, while the segment’s customer count jumped 73%. Additionally, the segment’s remaining deal value — which provides insight into the company’s future growth potential — increased 99%.
This wasn’t just a one-off, either. Palantir’s revenue and earnings have accelerated in each of the past seven quarters, with no signs of slowing.
Wall Street’s (decidedly short-term) take
Given the company’s track record of consistent execution and expanding profitability, you might be surprised to find that Wall Street is decidedly bearish on Palantir’s prospects – but that requires context. The stock’s parabolic move higher in recent years has been accompanied by a commensurate rise in its valuation. Palantir is currently trading for 210 times forward earnings and 57 times forward sales, which many would agree is egregiously overpriced, but those numbers come with an asterisk.
The most commonly used valuation metrics tend to fall short when measuring high-growth stocks like Palantir. For example, using the less common and more appropriate forward price/earnings-to-growth (PEG) ratio, Palantir sports a multiple of about 1, which suggests the stock is fairly valued.
Nonetheless, many on Wall Street remain leery. Of the 25 analysts who offered an opinion on Palantir in April, only four rate the stock a buy or strong buy, 16 recommend holding, and five rate it underperform or sell. That means 84% of analysts don’t believe Palantir is a buy right now. It’s worth noting that Wall Street is generally focused on the next 12 to 18 months, and Palantir’s growth story is likely to play out over the next decade.
One representative view comes courtesy of Argus Research analyst Joseph Bonner, who noted late last year, “The market tends to punish highly valued tech stocks.” That call was prescient: between Feb. 18 and March 10, Palantir stock slumped 39%. This helps to illustrate that while the future looks bright, the near term is likely to be marked by wild volatility.
Focus on the long-term
To be clear, the current environment is fraught with uncertainty. The backdrop of inflation, tariffs, and fear of a pending recession has some investors battening down the hatches. However, Palantir could actually benefit from the economic uncertainty, according to Ark Investment Management CEO, Cathie Wood. “When businesses and consumers are scared, they’ll change the way they do things, and that’s usually good for the companies that are helping others do things better, cheaper, faster, more creatively, and more productively,” she said.
Wood went on to say that Palantir is well positioned for an AI-driven future. “We think Palantir is going to be one of the biggest beneficiaries as companies try and make themselves more efficient and move into the AI age,” she said, “You’ve got the C-suite really trying to figure this out, understanding strategically that if they don’t jump into the AI age, they’ll be left behind.”
In fact, Wood goes further. In a post on X (formerly Twitter) on Saturday, Wood said, “CEO Alex Karp believes that [Palantir] will become the largest pure-play enterprise AI software company in the world. I believe him.”
That said, it’s critical that Palantir shareholders adopt a long-term view, as the stock price is likely to continue to be volatile. One strategy for investors who are intrigued but don’t yet own a stake is to buy a small position and be prepared to add opportunistically during stock price declines. Another strategy is dollar-cost averaging, in which investors build a position by adding set dollar amounts over time, which results in adding fewer shares when the price is higher and more when the price is lower.
Being a Palantir stockholder isn’t for the faint of heart, but adopting a long-term outlook and building a stake over time can be effective strategies for what will probably be a volatile but potentially lucrative investment.