Palantir Technologies (PLTR 3.73%) has been on a tear so far in 2023, riding the wave of accelerating adoption of artificial intelligence (AI) and the ongoing recovery of technology stocks. Shares of the AI and data analytics specialist are up 83% so far this year, roughly nine times the 9% gains of the S&P 500. This is in stark contrast to what happened in 2022, when the stock lost more than 32%.
While excitement surrounding AI -- the company's bread and butter -- helped fuel its rise, Palantir's better-than-expected financial results were also a factor. They suggested enterprise businesses were beginning to loosen the purse strings in the latest sign the economy may have turned the corner. Investors are increasingly hopeful that the macroeconomic headwinds that have plagued Palantir's stock over the past year might finally be abating.
What does this mean for investors who missed out on Palantir Technologies' recent epic run? Should they buy now with the expectation of further gains or avoid the stock because of its lofty valuation? Let's take a look to see what the data reveals.
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What's been weighing on Palantir stock?
It's hard to argue that the biggest driver of the dismal market performance in 2022 was mounting concerns about the overall economy -- and rightfully so. The falling market indexes were fueled by inflation that hit 40-year highs, along with the commensurate rise in interest rates. As a result of the challenging environment, consumers and businesses alike were forced to cut costs and prioritize spending.
Historically speaking, budget cuts are particularly acute in areas of the business that aren't mission critical. While some might argue that data analytics provide the information necessary to make educated business decisions, others view them as a luxury -- nice to have when the economy is flush, but certainly not a necessity.
This was evident in Palantir's performance in 2022, as full-year revenue grew 24%. While that's certainly respectable, it was a 41% decline from its impressive gains of 41% in 2021. The sharp deceleration in growth had some investors wondering if the downshift was temporary or permanent. However, given the economic environment at the time, it isn't surprising that businesses might forego Palantir's AI services until the economy found better footing. History is rife with examples of companies cutting back, only to resume their usual spending habits when conditions improve.
Furthermore, while Palantir Technologies has only been a public company since 2020, it has been crafting its data analytics process and AI algorithms for two decades -- so it has a vast head start on many of the so-called experts that are only just now jumping on the AI bandwagon.
This gives Palantir a distinct advantage when businesses decide to integrate AI into the processes.
What could drive Palantir stock higher?
When Palantir released its first-quarter financial results, there was a pleasant surprise for shareholders. The company generated a profit for the second consecutive quarter and now expects to remain profitable in each and every quarter for the rest of the year. The company is also operating and free-cash-flow positive, which supports Palantir's assertion regarding its profitability.
It's hard to talk about Palantir's future prospects without considering the broader implications of AI. In fact, in the company's recently released shareholder letter, CEO Alex Karp addressed the accelerating demand for its services, saying, "The depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent."
The increasing demand for Palantir's AI services isn't surprising, particularly given the recent advances in generative AI and chatbots. Companies are just now beginning to understand the likely business applications and potential for productivity gains made possible by AI.
Cathie Wood, CEO of Ark Investment Management, recently released the firm's Big Ideas 2023 report, and some of the implications are startling. AI is expected to lead to a tenfold increase in coding productivity, while increasing the productivity of knowledge workers fourfold. Furthermore, if software vendors are able to capture just 10% of the value created by their products, AI software could generate up to $14 trillion in revenue and $90 trillion in enterprise value in 2030, according to the report.
The data suggests that companies that ignore the implications of AI do so at their own peril.
How to approach Palantir stock now
Palantir isn't exactly cheap, but it is near its lowest valuation ever. The stock is currently selling for roughly 13 times trailing sales, and an only slightly better 10 times next year's sales, so the stock isn't going to be for everyone. Still, while value investors likely won't be convinced, I'd suggest that it's a reasonable price to pay for a company that's forecast to generate double-digit revenue growth and quadruple its earnings per share between now and 2024.
Furthermore, given the rapid adoption of AI and Palantir's particular skillset, expectations for the company's growth could well be conservative.
