Cathie Wood -- the founder and CEO of ARK Invest -- is a widely followed investor on Wall Street thanks to her strategy of investing in disruptive and innovative companies, and this strategy has reaped rich rewards in 2023 as her flagship exchange-traded fund, the ARK Innovation ETF has gained an impressive 60% this year.
ARK Innovation slid big time in 2021 and 2022 as some of the fund's key holdings were hit by the reopening of offices, rising inflation, recession fears, and the subsequent sell-off in tech stocks. However, the fund's impressive comeback in 2023 indicates that Wood's commitment to her strategy could indeed pay off in the long run despite periods of volatility in the short run. Not surprisingly, Wood focuses on an investment timeline of five years, and ARK Innovation ETF's surge in 2023 tells us that investors following her strategy need to be prepared for some volatility if they are to achieve high growth over a longer period.
Wood is now loading up on shares of Palantir Technologies (PLTR 3.73%), a company that's known for building and deploying software platforms for federal agencies, and that some expect will win big from the growing adoption of artificial intelligence (AI) software platforms. It is worth noting that Palantir stock has surged an impressive 177% in 2023. So, the fact that ARK Invest is scooping up the company's shares even after such remarkable gains suggests that Wood is confident of even more upside.
Wood doubles down on Palantir stock
On Dec. 6, the ARK Innovation ETF bought 1.2 million shares of Palantir, nearly doubling its stake in the company. The fund had previously purchased 525,000 shares of Palantir in August and roughly 745,000 shares in September. Wood's latest move came amid a correction in Palantir stock. It has lost over 12% of its value so far in December, a decline driven in part by negative analyst commentary.
William Blair analyst Louie DiPalma recently asserted that a four-year contract worth $458 million that the U.S. Army awarded to Palantir in December 2019 may be downsized when it is renewed. DiPalma pointed out that the new contract could be worth only $116 million and would run for two years, as additional vendors are likely to get a share of the work.
Wood, however, sees this dip as an opportunity. That's not surprising, as the celebrated investor is focusing on the bigger picture. Though the company currently gets 55% of its revenue from government contracts, its commercial business revenues are increasing at a rapid pace. In the third quarter, Palantir reported a 23% year-over-year increase in commercial revenue to $251 million, outpacing its 12% growth in government-related revenue.
The company also reported a 45% year-over-year increase in its commercial customer count last quarter, outpacing the 34% growth in its overall customer count. Artificial intelligence (AI) seems to be playing a central role in driving the growth in its commercial customer base. That's because there is robust demand for the Palantir Artificial Intelligence Platform (AIP), which was launched in May this year.
In his recent letter to shareholders, CEO Alex Karp wrote:
The reacceleration in the growth of our U.S. commercial business, the new and emerging center of our company, is aided by the growing demand that we are seeing for our new Artificial Intelligence Platform (AIP), which was released only months ago.
He added that "companies across industries in the United States are scrambling to deploy software platforms that will allow them to leverage the power of the latest large language models." The Palantir AIP is being deployed in multiple industries ranging from healthcare to retail to electronics manufacturing. Palantir says that it nearly tripled the number of AIP users in the third quarter.
Palantir is now looking to improve the adoption of AIP through "boot camps," where it will teach customers how to deploy and make the most of the platform. Management pointed out on the earnings conference call in November that organizations attending its boot camps have seen substantial improvements in their operations. The company also said that it is witnessing "vast improvements on [sic] our unit economics from initial contact to customer conversion, all while accelerating new customer negotiations."
Palantir conducted boot camps for 140 organizations last month. This could translate into stronger adoption of AIP and help accelerate the company's growth.
The stock is expensive, but it could justify its valuation
Palantir stock is trading at nearly 19 times trailing 12-month sales. That seems on the higher side considering the company's revenue is expected to increase by just 16% this year to $2.22 billion. However, its potential to capitalize on part of what some view as a $1 trillion revenue opportunity in the AI software market could help it grow into its valuation.
In addition, Wall Street analysts expect Palantir's earnings to grow at an annualized rate of 85% over the next five years. That implies a bottom line of $5.40 per share by the end of 2028 -- if it delivers the massive growth that analysts are forecasting. Multiplying the projected earnings by the Nasdaq-100's forward price-to-earnings ratio of 27 as a proxy for the average tech stock, and assuming the index's valuation remains unchanged over that period, it implies a stock price of $146 -- more than eight times its current share price.
All this makes Palantir a top growth stock to seriously consider for your portfolio following its pullback, which is exactly what Wood has been doing.
