When it comes to artificial intelligence (AI), companies such as Alphabet, Microsoft, and Nvidia seem to have become analogous to the buzzword. While it may appear that big tech has a stronghold on advancements in AI, one under-the-radar company looks to be emerging quickly as a leader in the space.
Palantir Technologies (PLTR 8.06%) is a big-data analytics company, perhaps best-known for its work with the U.S. Government and its support from Silicon Valley entrepreneur Peter Thiel. Palantir is nearly 20 years old, yet it only went public about three years ago. Since its debut on the New York Stock Exchange in late 2020, Palantir stock has been no stranger to the highs and lows of public company scrutiny.
Following its initial public offering, famed tech investor Cathie Wood accumulated a large position, which in part helped fuel a buzz around the company and sent its stock soaring. However, Wood exited her position entirely in 2022 over concerns about the company's ability to execute on its growth vision. Some critics have also labeled it as no more than a consulting company.
Despite these challenges, Palantir's business has thrived so far in 2023. In this article, I will detail Palantir's catalysts and what it could signal for the company's long-term prospects.
A bevy of unprecedented demand
When analyzing a stock, investors should keep in mind that there is far more to a company than its financial statements. One variable to keep top of mind is a company's vision, and shareholder letters can be a fantastic resource for getting a glimpse of that outlook.
Palantir CEO Alex Karp shared in his Q2 letter that the barriers to entry to develop large language models (LLMs) and generative AI "have been higher than many initially anticipated." As a result, he says that "demand for AIP [Artificial Intelligence Platform] is unlike anything we have seen in the past twenty years." Let's dig into the specifics.
The financial picture is taking shape
Image source: Palantir Investor Relations and The Motley Fool.
Per the graphic above, Palantir's Q2 revenue of $533 million represented 13% growth year over year and beat its prior guidance. Furthermore, Palantir raised its full-year 2023 revenue target for the second consecutive quarter.
While the top-line growth is nice to see, I am more encouraged by the company's consistent profitability and cash flow. Palantir was GAAP (generally accepted accounting principles) profitable for the third consecutive quarter and reported adjusted free cash flow of $285 million for the first six months of 2023, representing 213% growth year over year.
A couple of weeks ago, I wrote an article urging investors to keep a close eye on the progress of AIP during Palantir's Q2 earnings. In his note, Karp shared with investors that AIP is already deployed across more than 100 enterprises and that Palantir is in discussions with another 300 firms exploring the platform. That's pretty impressive given that AIP was launched to the public a mere three months ago.
To me, this dynamic is not entirely surprising. Given that Palantir has been around for two decades, it's becoming clearer that solving complex needs at an enterprise level has been in the DNA of the company's software from its early days. The demand that Palantir is witnessing for AIP seems to be a major tailwind for the company's near-term and long-term prospects.
Should Palantir continue to see success in its AI endeavors, the company could propel itself into an undisputed market leader and separate itself from even the largest tech behemoths.
How does valuation stack up against peers?
The chart above reflects Palantir's year-to-date return versus the S&P 500. Palantir shares currently trade at 16 times price to sales (P/S). By comparison, Microsoft, Alphabet, and Nvidia trade for P/S ratios of 11.4, 5.8, and 41.1, respectively. Investors can see that Nvidia is the clear outlier among this cohort of AI developers. But Palantir also trades at a bit of a premium compared to some of its competition.
Despite its rich valuation, some on Wall Street are pouring into the stock. In fact, Wood has been steadily rebuilding a position in Palantir. Most recently, she added about 1 million shares in the days following Palantir's Q2 earnings.
The strong demand that AIP is generating for Palantir, combined with the company's consistent profits and strong liquidity position, make it a compelling choice for investors looking for exposure to artificial intelligence. I personally view Palantir as a pioneer in AI and believe it will emerge as a leader in the space within the next couple of years.
While Palantir stock likely needs a breather, investors with a long-term time horizon could still feel comfortable initiating a position by dollar-cost averaging at these levels.
