This year could arguably be dubbed "the year of artificial intelligence (AI)." Since entering the spotlight in early 2023, the public and investors alike have become enamored with generative AI. This recent technological breakthrough in AI was years in the making and is the foundation of ChatGPT and other high-profile chatbots.
Yet, this is just the tip of the iceberg of what AI can accomplish. The process that enabled these advancements has been on the drawing board for years and one of the pioneers behind this technology is data mining specialist Palantir Technologies (PLTR -0.23%). The company has been developing AI tools for the U.S. government and its allies for more than two decades and its enterprise business is finally beginning to gathering steam.
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The strong finish caught Wall Street off guard
For the first quarter, Palantir reported results that caught investors off guard and they were pleasantly surprised. Revenue grew 18% year over year to $525 million, fueled by government revenue that grew 20%, while commercial revenue climbed 15%. The overall results far exceeded analysts' consensus estimates of $506 million.
Perhaps most surprising, however, was the rapid improvement on the bottom line. Palantir generated GAAP profits for the second consecutive quarter, and GAAP operating profitability for the first time in the company's history. The company delivered income from operations of $4 million, up 1,000 basis point year over year. The resulted in earnings per share (EPS) of $0.01. On an adjusted basis, EPS of $0.05 sailed past exceeded expectations of $0.04. The company also generated operating cash flow and free cash flow of $187 million and $189 million, respectively.
Perhaps most importantly for investors, CEO Alex Karp said, "We now anticipate that we will remain profitable each quarter through the end of the year."
"Without precedent"
In the company's letter to shareholders, Karp was even more bullish, particularly related to the accelerating adoption and strong demand for AI. "The arrival of the latest large language models (LLM), which have provided the world with the first real hints of more generalizable forms of artificial intelligence, will transform enterprise software," Karp posited.
He went on note that the technology that Palantir has been building for years provides the foundation to leverage the capability of these new AI models.
Palantir also introduced its Artificial Intelligence Platform, a set of proprietary tools for unleashing the power of the LLMs that underpin generative AI.
The customers' first-party data, combined with Palantir's AI and data analysis ecosystem and these foundational LLM's, will help businesses leverage AI while maintaining full control over their data.
While it's still too early to gauge the future success of these more recent efforts, the initial signs are encouraging. "The depth of engagement with and demand for our new Artificial Intelligence Platform is without precedent," he wrote.
The future's so bright, I gotta wear shades
For the upcoming second quarter, Palantir is guiding for revenue of roughly $530 million, up 12% year over year at the midpoint of its guidance. Furthermore, as a result of the current AI goldrush, Palantir has boosted its full-year outlook. Management is now expecting revenue of $2.21 billion, an increase of about 16% at the midpoint of its guidance, up from its previous forecast of 15% growth.
Palantir's guidance could well end up being conservative. During the quarter, the company's total contract value surged 60% year over year to $397 million while billings of $614 million climbed 25%. Since these metrics are both forward-looking indicators, the robust increases suggest Palantir's growth spurt could just be getting started.
The tip of the iceberg
While most experts agree that the market opportunity for AI will be vast, estimates vary wildly regarding the potential size of the market opportunity.
One of the more optimistic takes comes courtesy of Cathie Wood's Ark Investment Management and its Big Ideas 2023 report. According to the firm's calculations, AI could "increase the productivity of knowledge workers more than fourfold by 2030 ... if vendors were to capture just 10% of [the] value created by their products, AI software could generate $14 trillion in revenue and $90 trillion in enterprise value in 2030."
While no one can know for sure what the future will bring, the current secular tailwinds resulting from the boom in AI bodes well for Palantir. The stock remains a buy.
