It's been roughly a year since the latest developments in generative artificial intelligence (AI) burst onto the scene, captivating Main Street and Wall Street alike. These next-gen algorithms can do much more than their predecessors, dramatically increasing productivity by drafting original documents, summarizing data, writing and correcting computer code, and even creating original presentations from existing data.
Microsoft co-founder and former CEO Bill Gates knows a thing or two about technology, and his views on AI are eye-opening: "AI is about to completely change how you use computers and upend the software industry," Gates noted recently. He goes on to say that over the next five years, generative AI "agents" will handle many day-to-day tasks, doing things that would have been unfathomable just a few years ago.
Conservative estimates peg the economic value of the generative AI market at more than $1 trillion, and some are many times that size. This could provide a windfall for the companies and shareholders positioned to benefit from the trend. One company that's long been at the cutting edge of AI research is Palantir Technologies (PLTR 3.73%). As the godfather of AI, the company represents a compelling addition to any AI portfolio.
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Toiling in the background for decades
Palantir Technologies is the brainchild of entrepreneur and PayPal co-founder Peter Thiel. In the wake of the 9/11 terrorist attacks, Thiel envisioned algorithms that could sift through the mounds of data that U.S. intelligence and law enforcement agencies collect, identifying patterns that could detect the activities of terrorists before they could strike. In fact, it was In-Q-Tel, the venture-capital arm of the Central Intelligence Agency, that became one of Palantir's first investors.
It didn't take long before Palantir's AI systems developed a deep following within the intelligence community, expanding to many other U.S. government agencies, including the Federal Bureau of Investigation, National Security Agency, and Department of Defense, among many others.
However, the biggest opportunity came not from the government but from the realization that these algorithms could be used as effectively for data mining and business analytics services for enterprises.
A vast and growing opportunity
What sets generative AI apart from earlier branches of AI is the aforementioned increases in productivity. Time is money, so the old saying goes, and businesses of all sizes are eager to share in the resulting windfall.
While many proffered estimates, no one knows how big the AI opportunity will end up being. Generative AI could become a $1.3 trillion market by 2032, according to Bloomberg Intelligence. A much more bullish take comes courtesy of Cathie Wood's Ark Investment Management, which estimates that AI software alone could drive incremental spending of $13 trillion by the end of the decade. With the market still in its infancy, nobody really knows for sure. What is clear is that an opportunity of this magnitude can't be ignored.
Paint by numbers
Palantir's recent results paint a compelling picture. In the fourth quarter, Palantir's revenue of $608 million climbed 20% year over year and 9% sequentially. The results were driven higher by U.S. commercial revenue that soared 70%, as demand for the company's generative AI-fueled Artificial Intelligence Platform (AIP) soared. As a result, Palantir generated its fifth consecutive quarter of profits under generally accepted accounting principles, with adjusted EPS of $0.08. Management went on to forecast at least 40% growth within its U.S. commercial segment over the coming 12 months.
For context, analysts' consensus estimates, which spiked before Palantir's financial release, were calling for revenue of $602.4 million and EPS of $0.08, so it was a strong performance by all accounts.
In Palantir's shareholder letter, management noted that projects that took "weeks or months, if not longer," are now "up and running in as little as a few hours." In order to keep up with the demand, the company has had more than 500 "boot camps" for customers since AIP made it debut. "In these immersive, hands-on-keyboard sessions, participants can expect to go from zero to use case in just one to five days," the company wrote.
Palantir also notes that demand is "unlike anything we've seen in two decades."
A compelling opportunity
Palantir stock has been on fire thus over the past year or so, gaining more than 250% since the start of 2023. Despite its meteoric rise, the stock remains remarkably cheap, with a price/earnings-to-growth ratio of roughly 1, the standard for an undervalued stock.
That price, combined with the significant demand for its products, and increasing sales and profitability, illustrates why Palantir Technologies is well positioned to benefit from this once-in-a-generation opportunity.
