Palantir Technologies (PLTR 0.51%), one of the forerunners of modern artificial intelligence (AI), is scheduled to report the results of its fiscal 2024 first quarter (ended March 31) after market close on Monday. Wall Street will be waiting with bated breath to review its performance -- and with good reason.
The stock has surged roughly 250% since the beginning of last year, driven higher by Palantir's improving financial results and the profit potential resulting from generative AI. Furthermore, its results could shed some light on the overall state of AI adoption.
Palantir has long been a leader in the development of AI, but investors will be watching closely to see if the company can continue to capitalize on recent demand -- and whether the current strong interest will continue. So should investors buy Palantir stock before its Q1 results are released? Let's see what the evidence suggests.
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A strategic shift and bountiful results
For years, Palantir seemed to concentrate exclusively on its sales growth. However, all that changed when the downturn hit in late 2021. Over the next couple of years, management set its sights on profitability, and those efforts paid off in spades.
When Palantir reported the results of its fiscal 2023 fourth quarter (ended Dec. 31), it marked the fifth consecutive quarter of generally accepted accounting principles (GAAP) profitability. Wall Street and investors alike cheered.
But that wasn't the only cause for celebration. Palantir's revenue grew 20% year over year and 9% quarter over quarter, fueled by increasing demand for AI tools -- the company's bread and butter. Most notable was Palantir's U.S. commercial segment, which grew 70%, while the customer count in the segment grew 55%.
As a result of this AI-induced stampede, the segment's total contract value soared 107%. These metrics clearly illustrate that demand for Palantir's AI expertise is high, and it's reasonable to expect its growth spurt to continue.
When demand for generative AI ramped up last year, Palantir was quick to pivot and develop a solution that businesses could use to solve real-world problems. The fruit of those labors was the company's Artificial Intelligence Platform (AIP). The generative AI-powered system not only helps streamline processes and simply mundane tasks, but also layers on top of Palantir's existing systems, adding another dimension to its usefulness. Shortly after its release, CEO Alex Karp noted, "Demand for AIP is unlike anything we have seen in the past 20 years."
Late last year, Palantir began hosting boot camps to help businesses jump-start their use of AI. In its fourth-quarter business update, management wrote, "These immersive, hands-on-keyboard sessions allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations."
This strategy has been wildly successful. In October, management planned to hold 500 such boot camps over the coming year to help its customers implement AI into their operations -- but didn't anticipate the overwhelming response to these sessions. Management noted that it has since "blown that goal out of the water," conducting more than 560 boot camps for 465 organizations in just four months. If that level of demand continued -- and there's every reason to believe that it has -- Palantir could report record-breaking results next week.
What's in store for Palantir on Monday?
For the first quarter, management's outlook is calling for revenue of $614 million, an increase of 17% year over year at the midpoint of its guidance. That seems surprisingly conservative, given Palantir's 20% top-line increase in Q4. Wall Street seems to agree, as analysts' consensus estimates come in at $625.3 million, which would represent gains of 19%.
There's a similar disparity with regard to Palantir's full-year forecast, which is guiding for revenue of $2.66 billion, an increase of 19%, while Wall Street's outlook is calling for growth of more than 21%. This helps highlight management's tendency to provide conservative guidance, which increases the likelihood that its results could surprise to the upside.
Should you buy Palantir stock now or wait until after earnings?
While there's always the temptation to "time the market" by jumping in and buying a stock in anticipation of a big move, that has proven to be a fool's errand and is more akin to gambling than investing. Investors would be better served by simply buying Palantir stock and holding on for the long term. History is clear: There's no way to know for sure how results will vary from quarter to quarter, or how investors will react following a company's financial report.
That said, the evidence suggests Palantir is on the right track and could continue to reap the benefits of the accelerating adoption of AI, particularly given its decades of experience in the field. However, the potential to profit from AI has attracted a lot of day traders and fair-weather investors, which will serve to increase the volatility of stocks with strong ties to AI -- and Palantir certainly falls into that category.
Further exacerbating the situation is the uncertainty regarding the eventual size of the AI market. The generative AI market is expected to be worth $1.3 trillion by 2032, according to Bloomberg Intelligence, though that's one of the more conservative estimates. Cathie Wood of Ark Invest believes that AI software alone will be worth $13 trillion by 2030.
While we can't pinpoint the exact value of the AI market, one thing is certain: The potential is there, and Palantir has developed a winning strategy to capitalize on this trend. If I had to hazard a guess, I suspect the stock is more likely to rise than fall after it reports its results. As a Palantir shareholder, however, I'm in for the long haul and less concerned about how the stock will move on a particular day.
There's also the matter of Palantir's valuation. The stock is currently selling for 68 times forward earnings and 15 times forward sales, which is enough to send value investors running for cover. When measured using the forward price/earnings-to-growth (PEG) ratio -- which takes into account Palantir's accelerating growth -- it has a multiple of less than 1, the standard for an undervalued stock. Investors will need to consider the disparity here and their risk tolerance as well.
However, for those looking beyond the current quarter, I believe investors should buy Palantir with the intention of holding it for years.
