2022's historic market downturn gave way to a solid rebound in 2023 for many stocks. The S&P 500 is up 20% from last year's bear market trough and is currently consolidating before attempting new heights. That next run-up could come sooner than expected, as the index currently sits just 6% below its all-time high (as of this writing). That would check the final box confirming the onset of another bull market.
There's a compelling argument that the catalyst for this year's recovery is the introduction of the next generation of artificial intelligence (AI), which promises significant productivity gains. This potential lit a fire under companies with knowledge in the field and few have amassed more AI expertise than Palantir Technologies (PLTR -1.21%). That said, the stock has yet to recover from its bear market battering and is still 56% off its high.
This represents a compelling opportunity for shrewd investors. The accelerating adoption of AI resulted in growing demand for Palantir's services, which is why investors should be buying this stock hand over fist before the bull market begins its next big run.
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Palantir has a long and storied history
AI has been all the rage this year, but the technology has been developing for decades. While it's been a public entity for just three years, Palantir Technologies was established in early 2003 by PayPal co-founder Peter Thiel in the wake of the Sept. 11, 2001, terrorist attacks.
Thiel theorized that the right AI algorithms, applied to legacy U.S. intelligence and law enforcement computer systems, could unearth important information that could help thwart future terrorist attacks. Thiel was right. It turned out that AI's ability to detect patterns buried deep in massive datasets proved invaluable to the U.S. government and its allies, providing a foundation for Palantir's growth.
That capacity to sift through mounds of data and detect patterns had important private-sector applications as well. Palantir expanded its offerings, providing business leaders with data mining and AI services that result in actionable intelligence that would otherwise remain buried in their data.
Palantir's proof is in the pudding
Palantir's latest earnings results, released last week, help paint an enticing picture. For the third quarter, revenue grew 17% year over year to $558 million, as commercial revenue grew 23%, outpacing government sales, which increased 12%. This resulted in adjusted earnings per share (EPS) of $0.07 and marked what management called "the most significant profit in the company's twenty-year history."
To put these numbers in context, analysts' consensus estimates called for revenue of $552 million and EPS of $0.05, so Palantir exceeded both benchmarks by a comfortable margin.
Perhaps as importantly, the company delivered its fourth consecutive quarter of profitability according to generally accepted accounting principles (GAAP), which management points out now makes Palantir "eligible for inclusion in the S&P 500." The company also noted that the revenue generated per employee is nearly double the level it was four years ago.
Helping fuel Palantir's accelerating results is the increasing demand for its Artificial Intelligence Platform (AIP), which was released just a few months ago. The AIP layers generative AI capabilities on top of its already robust AI applications. Management has previously noted the "demand for AIP is unlike anything we have seen in the past 20 years."
The generative AI catalyst
The introduction of ChatGPT late last year demonstrated the massive potential represented by generative AI. The ability of these AI models to find and summarize data, create original content, draft email responses, and compile business analysis -- among many other tasks -- set off a veritable AI arms race. Given its long history of AI experience, Palantir pivoted to create systems to meet the surge in demand.
Just how large is this opportunity? No one knows for sure, but that hasn't stopped Wall Street pundits from providing estimates, which are eye-opening. Two of the more conservative estimates were released by analysts at Morgan Stanley and Goldman Sachs, which calculate the productivity gains will result in incremental revenue of $6 trillion and $7 trillion, respectively, to the economy by the end of the decade. Cathie Wood's Ark Investment Management is much more bullish, suggesting AI software alone could generate $14 trillion by 2030.
Given the magnitude of the opportunity, generative AI could be the catalyst that propels Palantir higher and into the next phase of its growth.
Buy Palantir stock like there's no tomorrow
There's another compelling reason to buy Palantir Technologies: It's selling for a song. The stock trades at just 17 times earnings, a significant discount to the price-to-earnings ratio of 24 for the S&P 500.
That dirt-cheap stock price, combined with significant demand for its products and increasing profitability, is why I believe investors should be buying Palantir stock hand over fist and holding it forever.
