Enthusiasm around artificial intelligence (AI) helped propel the markets higher in 2023. In particular, positive sentiment for the "Magnificent Seven" stocks played a major role in the Nasdaq Composite's sizzling 43% return last year.
With that said, savvy investors understand that many other tech enterprises are emerging as beneficiaries of the AI revolution. Data analytics firm Palantir Technologies (PLTR 3.73%) -- a Cathie Wood favorite -- soared by more than 160% last year thanks in large part to the excitement around AI.
While the S&P 500 has kept its hot streak alive so far this year, Palantir has not. Following a recent downgrade from a Wall Street analyst, Palantir stock fell.
Yet Wood is doubling down on the stock and maintaining her conviction. Should you follow her lead and take this as an opportunity to buy the dip?
What just happened?
Earlier this month, Brent Thill, an analyst at Jefferies, downgraded Palantir stock. Thill's primary thesis was that there are better investment opportunities among big tech companies than Palantir, despite its progress in its market.
This is far from the first time Palantir has been doubted by research analysts. Some short-sellers view Palantir as a glorified government contractor, given its heavy reliance on public sector deal flow. Moreover, this latest downgrade from Jefferies wasn't the bank's first bearish call on Palantir.
In addition, Morgan Stanley previously expressed a similar concern -- echoed by Thill -- asserting that Palantir has yet to truly recognize its AI potential, and yet the stock has been applauded by investors and bid up significantly over the past year.
Following Thill's downgrade on Jan. 5, Wood purchased an additional 1 million shares of Palantir.
Cathie Wood and Ark Invest's trade activity from today 1/5. pic.twitter.com/mJ9Cfxx3Ot
-- Ark Invest Daily (@ArkkDaily) January 6, 2024
Currently, Palantir stock is the 25th largest holding among Ark Invest's exchange-traded funds (ETFs) and represents 1.3% of its combined portfolio.
Image Source: Getty Images.
Palantir's business is thriving
Palantir markets its software products via four channels: Foundry, Apollo, Gotham, and Artificial Intelligence Platform (AIP). AIP was launched in 2023, and early signs indicate that it could be a monumental success.
Following AIP's release, Palantir began hosting immersive seminars it called boot camps. During these events, prospective customers are able to demo Palantir's various software platforms with the goal of identifying a unique use case centered around AI. While it's still early days, demand for boot camp attendance is off the charts. Perhaps more importantly, Palantir's latest artificial intelligence offerings have played a considerable role in helping the company evolve beyond its close business relationship with the U.S. military and the governments of its Western allies.
Image Source: Palantir Investor Relations
The chart above illustrates Palantir's growth across both the private and public sectors. In the third quarter, Palantir's revenue from commercial customers increased 23% year over year -- nearly double the rate at which its government business grew. Moreover, the rate at which Palantir is acquiring new customers shouldn't be overlooked.
It's clear that interest in AI applications is on the rise. But with such intense competition and with many businesses not yet having clear AI strategies identified, investors should indeed be considering last year's run-up in Palantir stock before taking a position.
Should you invest in Palantir stock?
PLTR PS Ratio data by YCharts.
The chart above illustrates Palantir's price-to-sales (P/S) multiple benchmarked against a cohort of other enterprise tech platforms. At a P/S of 17.2, Palantir's valuation is middle of the pack among growth stocks such as ServiceNow, DataDog, and MongoDB.
At the core, I think that the Wall Street skeptics do have a point. Should Palantir meet its revenue projection for 2023, the company will only have generated about 16% growth. Although this is respectable, keep in mind that management was calling for annualized growth of 30% or more through 2025 just a couple of years ago. But to be fair, much of the slowdown in Palantir's top-line growth is attributable to macroeconomic factors that have hurt corporate IT budgets.
When it comes to Palantir, I don't think management gets enough credit for running such an efficient business. The company is consistently profitable on a generally accepted accounting principles (GAAP) basis, and has found a creative way to generate robust pipeline leads without ratcheting up marketing spending. Although the demand for AIP is not yet translating into eye-popping financial results, its long-term upside could be quite lucrative.
As Palantir continues bringing in customers, the company has opportunities to cross-sell and upsell additional services to them. For this reason, I feel that Palantir's best days are ahead, and that exponential growth powered by AI innovation could be very much in store in the company's future. A prudent strategy for investors could be to begin building a position through dollar-cost averaging, and exercising patience and discipline as the long-term picture unfolds.
