There's no denying the challenges investors faced in 2022, which was one of the most difficult years in decades. After shedding more than 35% in 2022, the Nasdaq Composite has come roaring back, rising 43% in 2023 as of this writing. Things have clearly taken a turn for the better.
Yet history tells us the rally is likely to continue. Going back more than 50 years, the year following a market rebound has generated additional gains of 19%, on average, for the tech-heavy index.
Most market watchers agree a major catalyst for this year's recovery was the advent of the next stage of artificial intelligence (AI). Unlike previous advances, a broad cross-section of businesses can now benefit from the productivity gains yielded by this technology. One company that's already reaping the rewards of its AI expertise is Palantir Technologies (PLTR 3.73%). The accelerating adoption of AI plays right to the company's strengths, representing a compelling opportunity for investors.
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Decades of real-world experience
While AI has taken the spotlight this year, it has been slowly gaining ground for years. Likewise, Palantir has only been publicly traded since Sept. 2020, but the company has been around since 2003 when PayPal co-founder Peter Thiel launched it on the heels of the 9/11 terrorist attacks.
Thiel developed tools that could be applied to the dated computer systems of U.S. law enforcement and intelligence agencies to detect patterns hidden deep within mounds of data, unearthing actionable intelligence and thus increasing the likelihood of preventing future attacks. Palantir's system thus became very valuable to the U.S. government and its allies.
Perhaps as importantly for investors, this groundbreaking technology has had important implications for business and enterprise as well. Palantir developed a companion system to focus on business analytics and data-mining services to provide the same actionable intelligence that made it so valuable for government agencies.
The next generation of AI
The debut of ChatGPT in late 2022 unleashed a tidal wave of interest in generative AI. These AI models have the ability to create original content, generate summaries and presentations from existing data, draft and revise computer code, and more, all of which promises significant productivity gains. Businesses of all stripes are scrambling to share in the windfall, and because of its vast experience in the field, Palantir has been able to quickly pivot to meet the growing demand.
To be clear, while the opportunity AI represents is vast, no one knows for sure how big it will get. Two conservative estimates come courtesy of analysts at Morgan Stanley and Goldman Sachs, which suggest the opportunity will be worth $6 trillion and $7 trillion, respectively, by 2030. Cathie Wood of Ark Investment Management is much more bullish, estimating that AI software will generate $14 trillion in spending by the end of the decade.
With an opportunity of that magnitude, Palantir could parlay the demand for generative AI into significant new revenue streams.
The numbers tell the tale
Palantir's recent results highlight its progress. For the third quarter, revenue grew 17% year over year to $558 million, fueled by commercial revenue growth of 23%, which outpaced government revenue's 12% increase. That performance resulted in earnings per share (EPS) of $0.03, up from a loss of $0.06 per share in the prior-year quarter.
Most importantly, Palantir generated its fourth consecutive quarter of GAAP profitability, which management called "the most significant profit in the company's 20-year history." Management also pointed out that Palantir is now "eligible for inclusion in the S&P 500," a development that could drive the stock even higher in 2024.
Helping fuel the results is the accelerating demand for Palantir's Artificial Intelligence Platform (AIP), which it released in the second quarter. The AIP helps businesses layer generative AI capabilities on top of existing systems. Management revealed that "demand for AIP is unlike anything we have seen in the past 20 years," which should soon begin driving its results.
A compelling opportunity
The excitement surrounding AI has fueled a significant run for Palantir in 2023 as the stock is already up 171% year to date
However, the combination of Palantir's increasing profitability and growing demand for its AI expertise still paints a compelling picture for long-term investors who want to tap into the AI revolution.
