Artificial intelligence (AI) stocks were all the rage in 2023 as the boom set off by ChatGPT was a major reason why the Nasdaq Composite jumped 43% last year.
By now, investors are likely familiar with the big winners like Nvidia, but one AI stock that has flown a bit under the radar is Palantir Technologies (PLTR 3.73%). Palantir builds software platforms that help governments, businesses, and other organizations parse through massive datasets and make connections that would otherwise be unseen.
Palantir was founded in the aftermath of 9/11 to help counterterrorism agencies improve their analytics and problem-solving in order to fix some of the oversights that led to that attack.
As a result, the federal government still makes up a large portion of the company's customer base.
Palantir, which went public through a direct listing in 2020, initially struggled on the public markets, but it began to gain momentum last year amid the broader gain in AI stocks and as the company proved it could be profitable on a generally accepted accounting principles (GAAP) basis. That helped propel the stock to a gain of 167% as the chart below shows.
Palantir has clearly rewarded investors over the last year, but is the stock still a buy? Let's take a closer look to see what the stock has to offer today in order to see if it's too late to buy it.
Where Palantir stands today
Palantir's most recent round of results impressed investors. The software company reported 17% revenue growth to $558 million in the third quarter, and reversed a GAAP operating loss of $62.2 million in the quarter the year before and reported a $40 million profit.
The company achieved these gains by cutting its share-based compensation and holding its other costs basically flat even as its revenue was up 17%.
Image source: Getty Images.
CEO Alex Karp said the improvement in revenue per employee, which reached $558,000 per employee in Q3, was a testament to the improvements in its software products, adding value for its customers.
In addition to the improving financials, there's another catalyst that's been driving the stock higher -- its recently launched Artificial Intelligence Platform (AIP), which combines machine learning technologies with the kind of large language models that are used by ChatGPT.
Management described the growth of AIP as "nothing short of remarkable" and has sped up its delivery of workflows from one to three months to just five days. It also noted "vast improvements on our unit economics," which have been borne out by the company's recent results.
Is it too late to buy Palantir stock?
Palantir stock is expensive, and its revenue growth isn't what investors are used to from high-growth software stocks at 17% in Q3, but there is a bright spot in its top-line growth. After a steady deceleration in revenue growth since its IPO, top-line growth accelerated in Q3, reaching 17% from 13% in Q2. The stock currently trades at a price-to-earnings ratio of around 75 based on adjusted earnings.
That seems like a fair valuation for a stock with a large addressable market to penetrate, estimated at $119 billion in its 2020 IPO, and one whose revenue growth is accelerating as the company's profit margins are rapidly expanding, though there's likely a ceiling on its operating margin.
Given the huge potential of artificial intelligence technologies including Palantir's AIP, it's not too late to buy Palantir stock. If the artificial intelligence platform starts to take off, Palantir could have a lot of upside growth in front of it.
