Palantir Technologies (PLTR 0.51%) has been on fire so far in 2023, fueled by a continuing resurgence in technology stocks. Shares of the data mining and analytics specialist are up 138% so far this year, nearly 10 times the 14% gains of the S&P 500. This is in stark contrast to its dismal performance in 2022 when the stock price dropped nearly 65%.
There's little doubt that Palantir's expertise and the rising demand for all things artificial intelligence (AI) drove the price spike. It's worth noting that Palantir focused on AI long before it was the "next big thing," giving it a distinct advantage compared to all the new kids on the block. Its long and distinguished history in the field fueled investor confidence that Palantir is well-positioned to ride the next phase of AI growth.
But what does this price bounce mean for those who sat out on Palantir's current epic run? Should they buy the stock now with the expectation of further gains, or delay buying because its frothy valuation is setting the stock up for a fall? Let's see what the evidence reveals.
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What's been weighing on Palantir stock?
It's clear the macroeconomic headwinds that plagued the overall economy over the past year had a negative impact on business spending. History shows that in challenging times, companies tend to batten down the hatches and cut discretionary spending in order to ride out the economic storm.
Those factors were evident in Palantir's 2022 results. While revenue increased by 24%, it was a far cry from the 41% gains the company generated in 2021. Cautious investors feared the worst and played it safe by sitting on the sidelines. After all, data mining and AI services could surely wait until there was a recovery on the horizon.
Many executives are rethinking that strategy as companies scramble to position themselves to profit from the ongoing AI boom. Many are turning to Palantir, which honed its AI and data analytics skills over the past 20 years -- long before AI caught investors' attention this year.
What could drive Palantir stock higher?
After years in the red, Palantir recently delivered its second successive quarter of profits, and CEO Alex Karp said, "We now anticipate that we will remain profitable each quarter through the end of the year." Further supporting this conclusion is the fact that Palantir is operating cash flow and free cash flow positive, which suggest its profits will continue.
Lest there be any question, the 800-pound gorilla in the room is surging demand for AI, something the company addressed in its first-quarter financial release. Karp was clear about the opportunity, noting, "The depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent."
Karp provided additional details in Palantir's shareholder letter, saying, "The arrival of the latest large language models (LLMs), which have provided the world with the first real hints of more generalizable forms of artificial intelligence, will transform enterprise software."
He went on to point out that what the company has been building for years is uniquely situated to take advantage of the latest advances in AI. Karp noted that the company's "foundational software architecture" leveraged by the latest LLMs would prove to be "transformational." Finally, he said Palantir had "already had hundreds of conversations with potential customers ... and are currently negotiating terms and pricing."
How to approach Palantir stock now
To be clear, Palantir Technologies isn't for the faint of heart. The stock is currently selling for 7 times trailing-12-month sales and 6 time forward sales. Given its lofty valuation, it wouldn't be surprising if value investors gave the stock a hard pass.
That said, analysts' consensus estimates call for Palantir to generate low-double-digit revenue growth in each of the next two years, and its profits are expected to increase more than fourfold. These projections could end up being conservative if demand for AI continues to accelerate.
Given the still-unfolding use cases for AI as a catalyst, Palantir's rally could just be getting started. That's not to say the stock might not experience a significant decline in the near future -- it certainly could. However, for those looking out a decade or more, Palantir could be a big winner multiple times over.
