Palantir Technologies (PLTR -0.23%) is off to a torrid start in 2023. The popular artificial intelligence (AI) stock is already trading up more than 80% since the start of the year.
And yet, plenty more gains could lie ahead for those interested in the stock. Here are three reasons why Palantir is a smart buy.
1. Palantir is enjoying broad-based growth
Businesses are flocking to the data analytics specialist's platform. Palantir's customer base surged 41% year over year in the first quarter. That included a 50% jump in U.S. commercial customers, to 155.
Palantir's Q1 revenue, in turn, rose by 18% year over year to $525 million. The gains were wide-ranging. Commercial sales expanded by 15% to $236 million, while government revenue increased by 20% to $289 million.
"We continue to see robust pilot starts and promising conversions and we're also beginning to see the realization of our expansion strategy, meaning we're beginning to see meaningful growth and upsell opportunities with our newer customer base," Chief Business Affairs and Legal Officer Ryan Taylor said during the company's first-quarter earnings call.
Taylor highlighted Palantir's work with BP, which helped the British oil giant slash its production costs by roughly 60%. He also noted that Palantir is enabling car rental leader Hertz to operate its 500,000-vehicle-strong fleet more efficiently.
CEO Alex Karp explained why more companies and government agencies were turning to Palantir for their data analysis needs, saying: "They want to know, can you provide the resources, the product we need tomorrow purely on a financial basis? But more importantly, to us and to them long term is, can you help us disrupt our adversaries?"
Karp went on to say that Palantir is uniquely positioned to meet its clients' needs, thanks to its cutting-edge technology, financial fortitude, and decades of experience dealing with highly sensitive information.
2. Management sees sustained profitability ahead
Palantir generated an operating profit for the first time in the first quarter. Its operating income checked in at $4 million based on generally accepted accounting principles (GAAP) and $125 million when excluding stock-based compensation. The company also produced $187 million in operating cash flow.
Better still, Palantir expects to remain profitable in the coming quarters. Management's guidance calls for full-year adjusted operating profits of $506 million to $556 million in 2023.
CFO David Glazer said Palantir's expense-control and efficiency initiatives should drive further profit margin expansion. Additionally, Karp and Taylor noted that the company's improving profitability and fortress-like balance sheet -- which included $2.9 billion in cash and investments and no debt as of March 31 -- would allow it to invest aggressively in AI.
3. AI is a massive opportunity for Palantir
Soaring demand for AI-powered solutions will be key to Palantir's growth. "The arrival of the latest large language models, which have provided the world with the first real hints of more generalizable forms of artificial intelligence, will transform enterprise software," Karp said in a letter to shareholders.
Palantir intends to provide software that will help companies make the most of large language models, such as those that power ChatGPT, as well as other advanced machine learning technologies.
Karp said "hundreds" of businesses expressed interest in its soon-to-be-launched AI offering. "The depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent," Karp said.
Moreover, Karp was profuse in his praise of the latest advancements in AI -- and their potential impact: "In the last 20 years, there's never been a development like this. You have a technology that will allow you to outproduce, change the margin of your company, understand your business, react on the battlefield quicker, predict things on the battlefield in a way, collapse your enterprise so that the top and the bottom actually work together, pre-empt attacks, create software that is so obviously dominant that adversaries quiver and scurry away instead of attacking us or our allies," he said.
Karp believes Palantir is well-situated to bring these powerful benefits to its customers.
"It has now become increasingly apparent that a platform that combines the capabilities of a foundational software architecture with those of the latest large language models is essential in order for the models to evolve into something of transformational value for large organizations," Karp said. "And what we are building will become that platform."
