Many investors consider Nvidia (NASDAQ: NVDA) the quintessential artificial intelligence (AI) stock because the chipmaker dominates the market for machine learning processors. Other investors might choose stocks like Amazon or Microsoft because most AI workloads will probably run in the cloud.
Wedbush Securities analyst Dan Ives has a different take. He recently told CNBC that Palantir Technologies (PLTR 0.68%) is "the best pure-play AI name." He admitted the company has a lot to prove, but he thinks his conviction will be borne out as Palantir begins to monetize its new Artificial Intelligence Platform (AIP) product.
Most Wall Street analysts are decidedly less bullish. In fact, Palantir currently has more sell recommendations than buy recommendations, and the median 12-month price target of $18 per share implies just 2% upside from its current price.
Is this stock worth buying?
Palantir is a data analytics company
Palantir helps clients turn chaotic data into smart decisions. Its two primary platforms integrate data and machine learning (ML) models into an ontology (a fancy word for digital information mapped to its physical counterparts). For instance, a product could be linked to the factory that made it, the carrier that shipped it, and the consumer who bought it.
The ontology surfaces that data through user-facing analytics tools and AI applications, providing decision-makers with actionable insights that drive better outcomes. Additionally, the platform records those decisions to create a feedback loop that supports AI/ML model optimization, a process known as ModelOps.
Palantir is a leader among AI/ML platform vendors
Several analysts have praised Palantir in the last year. Forrester Research named the company a leader in AI/ML platforms, noting that Palantir has a stronger product than any competitor. Similarly, Dresner Advisory Services recognized its leadership in ModelOps, as well as AI/ML and data science. Those acknowledgments are an important signal to prospective customers.
Palantir is leaning into its strength in AI/ML with its recently launched AIP product. AIP integrates with its existing platforms for government and commercial clients to add support for large language models. In doing so, AIP lets users integrate generative AI capabilities into their ontologies to automate various workflows.
Palantir has also reoriented its go-to-market strategy around AIP bootcamps, five-day events in which clients learn how to build and deploy AI solutions using real data from their businesses. That is a remarkable acceleration from past pilot programs that lasted anywhere from one to three months, and the shift in go-to-market strategy appears to be paying off.
Chief Revenue Officer Ryan Taylor had this to say about bootcamps on the latest earnings call: "Early indications point to vast improvements in our unit economics from initial contact to customer conversion, all while accelerating new customer negotiations. Bootcamps are also driving contract expansions."
Palantir made progress in the third quarter
Palantir reported solid results in the third quarter. Commercial revenue increased 23% and government revenue increased 12%, such that total revenue rose 17% to $558 million. That sequential acceleration (from 13% growth) reflects increasing demand for AIP among commercial clients.
Government revenue decelerated during the quarter, but management expects a reacceleration in the future as those clients adopt AIP. "The potential market for AIP and the trajectory of possible AIP growth for our business is massive," Taylor said.
On the bottom line, Palantir achieved its fourth consecutive quarter of generally accepted accounting principles (GAAP) profitability. Net income improved to roughly $72 million, up from a loss of $124 million in the prior year. Cost control efforts and improved go-to-market efficiency were the driving forces behind that profitability.
The only concerning metric is customer count. While Palantir increased its customer base 34% during the third quarter, revenue is still quite concentrated because the company has only 453 customers. Investors should monitor that metric in future quarters.
Palantir stock trades at a reasonable valuation
To summarize, Palantir is a recognized leader in AI/ML platforms and ModelOps, and AIP could cement its strong presence in those markets. The company has a relatively small number of customers, meaning revenue is highly concentrated, but AIP could draw more customers to Palantir in the future.
The big data software market is expected to grow at 12% annually through 2027, while the ML platforms market is projected to increase at 35% annually through 2032. Palantir should land somewhere in the middle. For instance, Morgan Stanley analysts expect the company to grow revenue at 20% annually through 2029.
In that context, its current valuation of 19 times sales seems somewhat reasonable, though certainly not cheap. Investors who can tolerate volatility should consider buying a position in this growth stock today.
