Palantir Technologies (PLTR +2.54%) is one of the hottest stocks involved with artificial intelligence (AI). In just the past 12 months, the data analytics company's stock soared by more than 230%. That's right up there with Nvidia and its 240% returns over the same period. Both stocks have benefited from soaring AI-related demand.
But given Palantir's more modest valuation of $55 billion (versus nearly $1.8 trillion for Nvidia), there could still be a lot more room for its stock to run.
NASDAQ: PLTR
Key Data Points
Palantir's cash flow is showing significant improvement
Generating ample cash is key to a business being able to pursue growth opportunities without having to rely on debt or secondary stock offerings. When its operations are self-sufficient, that can open up significantly more opportunities for a business.
In the fourth quarter (ended Dec. 31, 2023), Palantir had operating cash flow of $301.2 million. That was more than double the $133.4 million cash it generated in the third quarter. On a year-over-year basis, operating cash flow was up 282%.
Cash flow may not get as much attention as sales or the bottom line, but investors shouldn't underestimate its significance. Growth on this metric can put Palantir in a much stronger position to invest in its operations or potentially pursue acquisitions. If the company can keep growing its cash flow, that will be a great sign for the business, and will likely attract more risk-averse investors to its stock as well.
Commercial revenue is rising at an increased rate
Last year, Palantir began hosting AI "bootcamps" for potential clients -- events designed to help companies uncover potential uses for Palantir's Artificial Intelligence Platform (AIP). It's still early, but there are signs these bootcamps may already be paying off. In Q4, commercial revenue totaled $284 million -- up 32% year over year and up 13% from Q3.
CEO Alex Karp remains upbeat, saying that demand has been "unrelenting," and noting that there were fewer than 100 commercial pilots done in 2022, but in 2023 that jumped to 130 plus more than 500 bootcamps. The commercial revenue number is what investors will want to monitor in future quarters, increases would be an excellent sign that the business is successfully converting bootcamp participants into clients.
Profit margins are looking great
Another metric that is sure to win over long-term investors is a strong profit margin. In Q4, Palantir's net income totaled $96.9 million, which was 15.9% of its top line. A quarter earlier, its profit margin was just 13.2%. That's a nearly 3 percentage point improvement for the company, which has now posted a profit for five straight quarters.
If Palantir is able to continue growing its top line while maintaining a strong profit margin, that could help bring down its price-to-earnings multiple, which can make the stock look like a much better buy in the future. A big reason some investors may be avoiding Palantir's stock today is that its valuation of more than 270 times earnings looks to have gone through the roof. But as that metric shrinks, the stock could attract more investors.
Should you buy Palantir stock?
Palantir's business looks to be on a promising path, and while its valuation may look expensive right now, the company may grow into it as it capitalizes on the opportunities that AIP opens up. The company's fundamentals are improving, and over time, Palantir's valuation can climb even higher. If you're willing to buy this AI stock and hold it for years, now could be a great time to add Palantir to your portfolio.
