The past several years have been a roller coaster ride for Palantir Technologies (PLTR +0.83%) investors. The stock has gained an impressive 193% so far this year, but those gains essentially served to return the stock to where it traded just before its 64% plunge in 2022.
Palantir has faced macroeconomic headwinds, but it hasn't been sitting idly by waiting for the storm to clear. As the demand for generative artificial intelligence (AI) technologies reached a fever pitch, the company used its decades of AI expertise to develop its own competitive generative AI systems in just months.
A quick look at Palantir's management, its original purpose, and its current trajectory will help illustrate why this stock has so much potential. Here are three things about Palantir Technologies that the smartest investors know.
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1. Palantir has a long tech pedigree
Palantir Technologies was co-founded by an enigmatic Silicon Valley figure -- Peter Thiel. The billionaire hedge fund manager was a founding member of PayPal, arguably the godfather of modern fintech. Thiel was also a member of the eponymous PayPal mafia, a group of entrepreneurs that are considered by many to be visionary tech leaders.
Thiel was also one of the investors who saw early on the potential of the social media platform, Facebook, which eventually morphed into Meta Platforms. He turned a $500,000 investment in the company into a cool $1 billion. He was also an early investor and backer of LinkedIn, which was started by his PayPal mafia colleague Reid Hoffman, and which was later bought by Microsoft.
Thiel's Founders Fund has invested in a laundry list of tech sector pioneers, including Airbnb, Spotify, Twilio, SpaceX, Stripe, and dozens of others.
2. A system to root out terrorists
One of the factors that contributed to U.S. intelligence agencies' failure to foresee and prevent the 9/11 terrorist attacks was the fact that the individual agencies didn't share critical data with each other. Further compounding the problem was that those agencies used a hodgepodge of antiquated computer systems that each held pieces of what was actually a complex puzzle.
Thiel proposed an elegant solution: a system that could aggregate the data from various agencies in a single place and analyze the resulting pool of information with state-of-the-art AI. The ability of these advanced algorithms to follow the breadcrumbs of numerous pieces of data that in isolation might seem innocuous -- a person booking a one-way plane ticket; wire transfers from foreign bank accounts; a rented truck -- and detect the potential for a terrorist attack. That notion planted the seeds that eventually grew into Palantir Technologies.
The company's name stems from the mind of The Lord of the Rings author J.R.R. Tolkien. The palantíri were indestructible "seeing stones" that would allow the user to see across great distances, see events from the past, or look into the mind of someone using another seeing stone.
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3. Generative AI is the logical next step
Over the past two decades, Palantir has established itself as the authority on AI systems and the go-to for a host of three-letter agencies within the U.S. government. These include the Central Intelligence Agency (CIA), the Federal Bureau of Investigation (FBI), the National Security Agency (NSA), and the Department of Defense (DoD).
The company has also provided services for a growing list of non-intelligence agencies, including the Centers for Disease Control and Prevention (CDC), the Department of Health and Human Services (HHS), and the Food and Drug Administration (FDA). Palantir was also instrumental in helping global health officials track the spread of COVID-19 during the pandemic.
Once it established itself as a resident expert for the U.S. government and its allies, Palantir turned its attention to private businesses, and set about developing a kindred system that could provide data-mining and business analytics for enterprises, which is now the company's fastest-growing segment. Helping drive this was Palantir's ability to quickly pivot and offer generative AI models and systems in addition to its flagship offerings. The debut of the company's Artificial Intelligence Platform (AIP) earlier this year was met with brisk adoption.
"The demand for AIP is unlike anything we have seen in the past twenty years," CEO Alex Karp said in the company's August letter to shareholders. He revealed that users in more than 100 organizations had already adopted the technology, and 300 others were looking to deploy the system, which can integrate proprietary data. Furthermore, by layering AIP atop existing AI systems, enterprise and government customers alike can get the best of both worlds.
The future looks bright
To say investors were thrilled with Palantir's third-quarter results might well be an understatement. Revenue grew 17% year over year to $558 million, and the company delivered its fourth consecutive quarter of GAAP profitability, validating its long-term strategy. The stock surged by 19% on the day following its Q3 report, adding to its already impressive gains for the year.
Palantir proved its expertise in AI long before it was fashionable. Yet the stock is still remarkably cheap, selling for 19 times earnings, a significant discount to the S&P 500's average price-to-earnings ratio of 24. Investors should load up on shares now before this fire sale is over.
