As 2023 draws to a close, investors might be wondering which companies have the best prospects heading into next year. Among tech stocks, it's hard to ignore the "Magnificent Seven:" Apple, Microsoft, Alphabet, Nvidia, Tesla, Amazon, and Meta Platforms. Each of these companies is at the forefront of artificial intelligence (AI) and is dominating industry sectors such as cloud computing and semiconductors.
One other company that I believe is emerging as a leader in AI is the data analytics provider Palantir Technologies (PLTR 3.73%). After a rock solid third-quarter earnings report, Palantir looks well positioned to compete with the world's largest tech companies for the long run. Let's look at its growth and why I think the party is just getting started.
It just keeps getting better
For many years, Palantir was largely considered to be a government contractor, given its close ties to the U.S. military and its Western allies. For this reason, Wall Street was not overly bullish on its growth prospects given the lumpy nature of government contracts.
While Palantir was trying to market itself as a sophisticated software platform, Wall Street just wasn't buying it. Nonetheless, over the last couple of years, the company has quietly built an impressive business and won over many new customers in the private sector.
Image source: Palantir Q3 2023 investor presentation.
The image above illustrates Palantir's customer growth over the last year. For the trailing-12-month period ended Sept. 30, it had 453 customers, which represented impressive 34% growth year over year. But the real gem here is the trend the company is seeing in the commercial sector. As of Sept. 30, it had grown its nongovernment clients by 45% annually to 330.
One of the ways Palantir has been able to catch on to the commercial sector so quickly is its ingenious customer acquisition strategy. Earlier this year, it opened up a boot camp program whereby potential customers can test out the company's various software platforms. The goal of these boot camps is to help prospective clients identify a use case centered around AI.
While these programs have only been in effect for a few months, management has made it clear that the demand they are witnessing is unprecedented. Moreover, if the figures in the charts above are any indication, it seems to me that AI is increasingly becoming a pillar in IT budgets, and companies are eager to test and purchase the best products available.
Image source: Getty Images.
Some catalysts to consider
As of the time of this writing, the stock is up nearly 200% year to date. It's reasonable to think it needs a breather at this point, and while I cannot predict in what direction the stock is headed next, I have a couple of strong cases for its long-term trajectory.
In the third-quarter earnings report, Palantir posted its fourth consecutive quarter of positive net income on the basis of generally accepted accounting principles (GAAP).
It's nice to see it generate consistent profitability, but there is something larger at play here. It has now met the criteria to be included in the S&P 500. To put this into perspective, the company would join its Magnificent Seven cohorts if it becomes a member of the S&P 500.
This could be a pretty big deal because it would likely help bring the company onto more investors' radar. Specifically, I think more institutional investors will begin to take Palantir a bit more seriously. This could result in more banks covering the stock and large hedge funds taking positions.
Both of these things could help Palantir's reputation in the long run and help the stock price should larger investors begin to pour into the shares.
Another thing to consider is Palantir's latest big win with Britain's National Health Service (NHS). Earlier this month, news broke that the NHS was doubling down on its partnership with the company by inking a seven-year deal with the company and other partners including Accenture. While the specifics around the deal vary, multiple media outlets have reported it could be worth as much as $600 million.
My long-term thesis for Palantir does not solely revolve around the company's data and AI capabilities. Rather, I think this NHS deal represents a broader theme in that Palantir will continue to land customers and expand their average contract values over multiyear periods.
Is Palantir stock a buy?
Despite Palantir's massive run so far this year, the stock is still down nearly 50% from its all-time highs. While this might suggest that now is a time to buy the dip, there are some other things to consider. Palantir's current forward price-to-earnings (P/E) is around 79. This is much higher than the S&P 500's forward P/E of roughly 20.
It's clear that the markets are valuing Palantir at more of a premium, which is not all that uncommon for growth stocks. For long-term investors, I'd still be a buyer at these trading levels. The company has done enough in my eyes to warrant a premium.
Moreover, Palantir has several different catalysts that could quickly fuel more revenue and profit growth, thereby helping the stock become more widely known. While it's not exactly trading at a rock-bottom bargain valuation, I'd encourage continuing to dollar-cost average into this AI leader before it's too late.
