When it comes to artificial intelligence (AI), the "Magnificent Seven" stocks of Microsoft, Apple, Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla garner much of the attention.
But outside of these megacap behemoths, savvy investors have identified other emerging players. One such opportunity is data analytics platform Palantir Technologies (PLTR 3.73%). Over the last year, shares in Palantir have soared 200%. That's quite impressive.
With such a meteoric rise in market value over a relatively short time frame, some investors may be curious if now is a good time for profit taking. After all, no stock can continue going up indefinitely, right?
Let's dig into why Palantir is enjoying a moment right now, and assess if trimming your position makes sense.
Palantir is making waves in artificial intelligence
2023 was hallmarked by a seemingly never-ending script of AI narratives -- many of which revolved around big tech. Microsoft kicked things off with its investment in OpenAI, the developer of ChatGPT. Amazon and Alphabet swiftly followed, each funding OpenAI competitor, Anthropic. In addition, Alphabet released its own generative AI chatbot called Bard, since renamed as Gemini.
Amid all of this hoopla, Palantir released its fourth flagship software product: Artificial Intelligence Platform (AIP). Given this product launch took a backseat to all the moves made by big tech, Palantir had to get creative.
The company employed a unique lead generation strategy to help market the release of AIP. Namely, the company began hosting "boot camps" -- or immersive seminars during which prospective customers have an opportunity to demo Palantir's products and identify a use case centered around AI.
This campaign has been paying off in spades. Since AIP's release last April, Palantir has hosted over 800 boot camps and increased its customer count by 35% in 2023.
The rapid customer acquisition, plus a financially strong profile supported by robust free cash flow and consistent profits, reignited enthusiasm for Palantir stock.
...and the stock is flying high, but...
The chart below benchmarks Palantir against a small cohort of high-growth software-as-a-service (SaaS) enterprises. With a price-to-sales (P/S) ratio of 25.9, Palantir is the highest valued stock based on this metric in the peer set below.
PLTR PS Ratio data by YCharts.
I see this as a bit misleading, though. Until mid-February, Palantir's P/S was trading at a much more reasonable level. What happened? The company didn't just knock it out of the park during its fourth-quarter earnings presentation. Palantir hit a grand slam in the bottom of the ninth inning to win the World Series.
The smashing success of AIP fueled revenue growth, margin expansion, and consistent cash flow during 2023. But what was even better was management's outlook as it pertains to the longer-term AI narrative. Palantir is proving it is moving at a faster pace than the competition, and even better days could be on the horizon.
...it's still trading at a steep discount from all-time highs
Given the rapid ascent of Palantir stock, I understand the temptation of profit taking. However, selling a stock simply because the price changes is often rooted more in emotion than sound, fundamental judgement.
Sure, Palantir stock is red hot at the moment. But consider the following: The stock is still 36% below its all-time high, something that doesn't look too obvious.
I see the recent price action in Palantir stock as mere rightsizing. In other words, the stock cratering to $6 at the end of 2022 wasn't deserved. Now, with shares trading much higher, it could be argued that Palantir stock is expensive.
Frankly, I see the premium over its peers as warranted. The company has a clear long-term vision centered around AI, which is more than other enterprise SaaS players can say. Moreover, the company's consistent profits have helped Palantir build a strong balance sheet and provide it with enviable financial flexibility.
While the stock has enjoyed a nice run, I'd continue holding here. The long-term picture looks strong, and the broader AI story is still being written. I think cashing out now leaves too much room for regret, as Palantir looks well positioned to kick into even higher gears.
