Shares of Palantir Technologies (PLTR 1.38%) surged much higher following its earnings announcement for the third quarter. Its current product lineup led to respectable, but not massive, gains in revenue.
But the third quarter was the first full period that its artificial intelligence platform (AIP) was available to its customers, and one factor could potentially bring massive gains to the software-as-a-service (SaaS) stock over time.
The key factor
The one thing investors need to remember about Palantir is its ability to drive impressive productivity gains for its customers through AIP.
The earnings release did not address this issue directly. Nonetheless, on the quarterly earnings call, chief business affairs and legal officer Ryan Taylor spoke about the massive performance improvements driven by the generative AI platform.
Taylor told analysts and shareholders about one customer increasing its velocity by using AIP, achieving more in one day than its top three hyper scalers accomplished in four months. He also spoke of another client accomplishing 10 times more using a third of the resources.
Taylor also said that AIP boosted the productivity of companies in different industries, citing HCA Healthcare and industrial uniform supplier Aramark as examples. Over the last five months, more than 300 organizations used AIP, according to Palantir.
Taylor did not outline any numerical results for these AIP clients, but if a company can accomplish in one day what used to take four months, it is probably not a stretch to assume that the business could save millions of dollars over a short time. It could also use those available resources for new lines of business, which could further boost revenue.
Palantir has only made a trial version of AIP available. But when it chooses to move forward, shareholders should benefit, as this software gives the company tremendous pricing power. Since pricing power usually increases gross margins, the level of profit growth could easily attract more interest from prospective shareholders.
Where Palantir stands
The 81% gross margin in the third quarter looks impressive now without AIP. During the quarter, Palantir reported $558 million in revenue, a 17% increase from year-ago levels.
But despite that sign of market strength, revenue growth is down from one year ago, when it typically surpassed 20%.
Moreover, the company reported its fourth consecutive quarterly profit with net income of $72 million. Although that is encouraging, Palantir's operating income of $40 million was only slightly above the $36 million in interest income earned after subtracting interest expenses.
Still, such numbers would probably not inspire the 190% price increase in shares so far this year. Nor would it likely take the price-to-sales (P/S) ratio from 6 to its current 20. This probably means shareholders are buying the stock amid the buzz surrounding generative AI, leaving investors to decide whether the current price fully reflects the company's potential.
Making sense of Palantir
Considering the massive potential for measurable productivity gains, investors should probably buy this stock. Indeed, generative AI has inspired excitement across the tech sector, and Palantir is not the only stock to benefit from massive increases this year. Moreover, the company did not present any hard numbers with these accomplishments, making the breadth of the benefits of AIP more difficult to measure.
Still, when it comes to direct impacts on an organization, most other tech giants might struggle to match the measurable accomplishments possible with Palantir's AIP. That by itself is an excellent argument for paying the stock's premium valuation.
