Palantir Technologies (PLTR -1.66%) is a software company specializing in big data analytics. It develops platforms that help governments, corporations, law enforcement, and other organizations integrate, visualize, and analyze large amounts of data that drive their decision making.
Like many tech stocks, it's enjoyed a recent turnaround, soaring over 150% year to date. Still, the stock is down more than 50% from its January 2021 highs. After such an impressive rally, new investors may hesitate to invest in the stock, fearing it's become overvalued.
But that's the wrong way to view it. Here's why.
The company has impressive financials
Amid the hype, it's important not to lose focus on Palantir's underlying financials and business performance. When you look under the hood, things seem to be trending in the right direction. Palantir breaks its revenue into two broad categories -- government and commercial -- and both have been growing revenue at an impressive rate over the past few years.
| Revenue | 2020 | 2021 | 2022 |
|---|---|---|---|
| Government | $610 | $897 | $1,072 |
| Commercial | $483 | $645 | $834 |
Source: Palantir, in millions
Palantir's first-quarter 2023 revenue grew by 18% year over year to $525 million ($289 million government, $236 million commercial), but more importantly, the company finally achieved operating profitability for the first time. It's the second consecutive quarter of net income profitability, however.
It's important to distinguish between the two because operating profitability refers to a company's profit from its core business operations. In Palantir's case, I believe it's better to focus on its operating profitability because it gives more insight into the strength and stability of its business.
Palantir expects revenue to be between $2.18 billion and $2.23 billion this year, and CEO Alex Karp said it expects to be profitable through the end of the year.
Palantir is making sure it doesn't miss the AI boom
Palantir recently introduced its artificial intelligence (AI) platform, appropriately named AIP, for Artificial Intelligence Platform. AIP allows customers to utilize large language models (like those that power ChatGPT) based on their own private data.
It was only a matter of time before Palantir released an AI-based platform, given its focus on big data and analytics, and the offering should help pad Palantir's bottom line. Karp said the demand for AIP was "without precedent" during the recent earnings call, indicating strong demand that should allow it to hit the ground running.
How true that is remains to be seen, but the early signs are promising, and given Palantir's track record and the growing demand for AI-powered solutions, it's likely that AIP could become a major contributor for Palantir. In Q1 2023, Palantir's total contract value was up 60% year over year, and this new offering should contribute to that as it becomes more widely available.
Not much room for error in its stock price
As a growth company with such high expectations, Palantir's stock likely faces a lot of risks if the company fails to deliver on revenue expectations. That's not a problem specific to Palantir, per se, but more so growth companies in their aggressive expansion stage. A slight change in assumptions about Palantir's prospects could significantly impact its stock price.
Still, the long-term potential remains unchanged. Instead of going all-in and risking sudden drops, investors should consider dollar-cost averaging their way into a stake. This can help hedge against the unpredictable nature of Palantir.
