Last year represented one of the sharpest rebounds in recent history for the Nasdaq Composite. A cohort collectively known as the "Magnificent Seven" played a pivotal role in the euphoric narrative surrounding artificial intelligence (AI) -- which sent technology stocks soaring.
But outside of this basket lies several other emerging players in AI. One company that made waves in the space is Palantir Technologies (PLTR 3.73%).
Palantir stock cratered to all-time lows in late 2022 over concerns about stalling growth in its core government business as well as doubts that it will ever penetrate the private sector in a meaningful way.
But in 2023, Palantir experienced something of a renaissance. Following the release of its new AI software last April, Palantir demonstrated that it means serious business when it comes to artificial intelligence (AI). Last year, the stock rose by a whopping 167%.
While this is quite a run, the momentum could just be getting started. Dan Ives of Wedbush Securities just upgraded his price target on Palantir stock to $35 per share, implying roughly 40% upside from current trading levels.
It was a milestone year for Palantir
The year 2023 marked an important juncture in Palantir's 20-year history. The company released its fourth major software suite: the Palantir Artificial Intelligence Platform (AIP).
The success of AIP helped fuel impressive customer growth for the enterprise-software developer. Palantir increased its customer count by 35% year over year. But more encouraging, the company grew its non-government customer count by 44% annually.
The acceleration of customer acquisition helped generate more than just increasing sales. Palantir's margins expanded materially in 2023; this led to free cash flow rising by more than threefold over 2022, to $730 million. Moreover, the company is consistently generating positive net income on a generally accepted accounting principles (GAAP) basis, helping strengthen Palantir's balance sheet.
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The long-term growth narrative is just beginning to take shape
Given the intense landscape surrounding the AI story, investors might be wondering how Palantir has managed to stick out. During a recent interview, the company's CEO Alex Karp proclaimed, "we don't play golf, we play software."
What Karp is ultimately getting at is that Palantir is focused on showing prospective companies how its AI capabilities work, as opposed to trying to win over new customers through expensive marketing and schmoozing efforts. This strategy appears to be working, and Ives has gone as far to say that Palantir's AIP is a "launching pad" for evolving use cases.
This is important to understand given the nascency of artificial intelligence (AI). While the technology itself existed for decades in some capacity, it's only risen in popularity over the last year or so. For this reason, businesses of all sizes are still in discovery mode, learning and understanding how AI best fits into their budget and can help decision-makers.
Is now a good time to invest in Palantir stock?
I'll acknowledge that Palantir stock's meteoric rise caused valuation multiples to become extended. Furthermore, despite its impressive financial and operating results, Palantir certainly has its fair share of competition.
Nevertheless, I still see Palantir as a compelling long-term buy. I'm encouraged by the company's ability to successfully commercialize AIP and think the rapid pace of customer acquisition is just getting started.
I think a prudent approach is to use dollar-cost averaging to build or add to a position in Palantir. While the overall positive sentiment is playing a role in fueling Palantir stock higher, the company's consistent profits and proven competitive advantage in the artificial intelligence (AI) realm makes the valuation premium warranted from my stance.
