As the artificial intelligence (AI) investing trend picks up steam, any company with AI heavily integrated into its products is worth looking into. While some companies use AI as a term to drum up interest, others have deeply integrated it into their offerings.
Palantir Technologies (PLTR 0.90%) has long used this technology, and the emergence of AI as an investing theme only justifies what the company has long known to be the future. So should you establish a position in Palantir? Let's find out.
Palantir integrated AI from the start
So much data is collected in today's digital landscape that humans cannot sort through it all in real time to use in generating decisions. A data analytics program like the one Palantir offers can do that sorting better and provide the information needed to make the best decision in a timely and accurate manner.
The company's software crunches mounds of data at lightning speeds and uses AI to give users the best recommendation. The software was initially developed to help government agencies, but it has now reached the public sector. Use cases include selecting sites for clinical trials, asset management, and identifying supply chain pinch points.
Palantir's newest product is its artificial intelligence platform (AIP), a large language model (LLM) that allows users to ask a chatbot a question and get an answer. Clients can deploy this add-on to the company's other products and receive actionable insights.
In the first-quarter conference call, CEO Alex Karp said the demand for its AIP surpasses anything else he has seen in 20 years there.
But AI isn't a new add-on for Palantir. In 2021, before the technology became popular, the company held the largest market share and revenue in AI software. And Forrester named it a leader in AI and machine learning platforms in the third quarter of 2022.
So Palantir's story looks good. But do the financials back it up?
Palantir results aren't spectacular now, but they could be in the future
Palantir is growing revenue but not as fast as expected. In the first quarter, revenue rose 18% year over year, and management guided for 12% growth in the second quarter. That doesn't sound like a great outlook, but it was given before companies like Nvidia issued extremely bullish second-quarter guidance, so the demand might not have been factored into that forecast. Don't be surprised if Palantir beats revenue expectations in the second quarter.
While not massively profitable, Palantir has now posted two consecutive quarters of $0.01 earnings per share using generally accepted accounting principles. That's not a lot in the grand scheme of things, but it shows the commitment to becoming profitable. Besides posting another quarter of profitability, the company increased its guidance from being profitable for all of 2023 to being profitable in every quarter in 2023.
The price-to-earnings ratio will become more useful as Palantir progresses along its profitability road map. So for now, we'll use its revenue to value the company using a price-to-sales (P/S) metric. As you can see, Palantir's valuation has ramped up significantly since Nvidia gave its guidance on May 24.
PLTR PS ratio, data by YCharts.
Even though Palantir didn't give earth-shattering guidance in its first quarter report, Wall Street can read between the lines and identify the beneficiaries of the trend. With the stock's run-up of 105% since its first-quarter earnings, it's clear that the Street has pegged the company as a winner.
So should you buy Palantir stock now? I think it's still OK to. At 17 times sales, the stock is expensive. But if AI becomes the trend many say it will be, its growth should rapidly ramp up. Even now, its value is like that of other software companies with similar growth rates.
Palantir isn't a stock to go all-in on, but I think investors can establish a small position to gain some exposure to the AI industry.
