Technology stocks dominated 2023. The "Magnificent Seven" helped send the Nasdaq soaring over 40% last year as themes in artificial intelligence (AI) began to take shape.
While megacap companies such as Microsoft, Alphabet, Nvidia, and Amazon have become synonymous with AI, savvy investors should understand that there are myriad opportunities beyond big tech. One of the more subtle winners last year was a Cathie Wood favorite, Palantir Technologies (PLTR 3.73%). While the data analytics business has long been viewed as a glorified government contractor, I see things a bit differently.
2023 was a milestone year for Palantir for several reasons. Let's explore the company's progress, and why 2024 could be even more lucrative.
Palantir's fabulous 2023
For several years, Palantir's software offerings were commercially sold under three monikers: Gotham, Foundry, and Apollo. But in 2023, the company released a new product called the Palantir Artificial Intelligence Platform (AIP). Unfortunately, I think the release of AIP was somewhat overshadowed by splashy investments made by big tech in start-ups like OpenAI, the developer of ChatGPT. Nevertheless, Palantir remained steadfast in its AI vision -- and early results are pretty impressive.
In an effort to silence the bears and bolster its presence beyond the government sector, Palantir launched a creative lead generation strategy. The company began hosting "boot camps," or immersive seminars during which prospective customers could test and demo its various software platforms. The end goal here is pretty straightforward. By allowing new leads to demo its products, Palantir is theoretically able to build a large sales pipeline both efficiently and at a low cost. Subsequently, should these leads convert into paying customers, Palantir now has the ability to cross-sell and upsell these customers over time.
According to the company, as of the third quarter, 200 companies have participated in boot camps and over 300 organizations have deployed AIP. Palantir's commercial revenue increased 23% year over year during the third quarter -- nearly double that of its government segment. Moreover, for the trailing-12-month period ended Sept. 30, Palantir's total customer count increased by 34%, with the commercial operation adding nearly 100 new customers during that time frame.
Image source: Getty Images.
What's in store for 2024?
Although it's nice to see Palantir's top line accelerate, it arguably doesn't mean as much if the company is outspending on customer acquisition. Fortunately, this is not the case. As of Sept. 30, Palantir has generated four consecutive quarters of positive net income on a generally accepted accounting principals (GAAP) basis -- a criteria that makes the company eligible for inclusion in the S&P 500. Moreover, Palantir's trailing-12-month adjusted free cash flow of roughly $500 million certainly strengthens the company's balance sheet, which boasted $3.3 billion in cash and equivalents at the end of the third quarter.
Given such an impressive performance last year, some investors might be curious as to why I think this year will be even better. Although Palantir's customer growth rates are well in excess of 30%, the company's revenue only increased about 14% year over year through September. Furthermore, at the midpoint of its full-year top-line forecast, the company is calling for approximately 16% annual growth.
To me, this signals that the rapid adoption of AIP is yet to be fully recognized from a financial point of view. Said another way, the customers that Palantir is onboarding from boot camps are not yet moving the needle for the company. I see this as a good thing, as many investors seem to be discounting the exponential growth Palantir could witness over the coming years.
Should you buy Palantir stock?
Palantir is a growth stock, often experiencing more pronounced volatility compared to blue-chip companies.
PLTR PS Ratio data by YCharts
The chart above benchmarks Palantir against a cohort of high-growth software businesses on a price-to-sales (P/S) multiple. At a P/S of 17.1, Palantir sits right in the middle among this peer set. With the stock trading nearly 60% below its all-time highs, I think Palantir represents a unique opportunity among the AI landscape.
While big tech will likely continue to garner the majority of attention from media and investors, I wouldn't sleep on Palantir. The company used 2023 to build the foundation of its AI roadmap. 2024 could mark the beginning of long-term sustained revenue and profit growth for Palantir, and I wouldn't be surprised to see more support from institutional investors seeking opportunities outside of big tech. Now could be a fantastic time to begin dollar-cost averaging into this AI player at an attractive valuation.
