Excitement surrounding artificial intelligence (AI) has captivated the investment community with both the S&P 500 and Nasdaq Composite trading near record levels. These gains are largely attributable to a small basket of megacap companies collectively referred to as the "Magnificent Seven" -- which includes Microsoft, Apple, Alphabet, Nvidia, Amazon, Meta Platforms, and Tesla.
While the Magnificent Seven have been pivotal to the widespread adoption of AI, there is a plethora of emerging opportunities in the AI realm outside of this cohort. One company that has also shared the spotlight is Palantir Technologies (PLTR 0.39%).
Palantir's business has been sizzling over the last year, and AI-driven momentum appears to be on the company's side. Investors have taken note with shares of Palantir nearly tripling over the last year.
While it's natural to think you've already missed the boat, zooming out and looking at the big picture tells a different story.
NASDAQ: PLTR
Key Data Points
Use cases are exploding
Last April, Palantir released its fourth flagship software platform, the Palantir Artificial Intelligence Platform (AIP). However, the AI landscape is jam-packed with competition. With big tech investing aggressively in the space and partnering with high-profile start-ups such as OpenAI, Anthropic, and Databricks, Palantir had to get creative with its rollout strategy.
The company started hosting immersive seminars called "bootcamps" during which prospective customers could test and demo Palantir's various software products and identify a use case built around AI. Since launching the campaign a year ago, Palantir has hosted 850 bootcamps.
The demand for these bootcamps has directly correlated with accelerating customer acquisitions. In 2023, Palantir grew its customer base 35% year over year, particularly outside its core government contracting business as private sector customers increased 44%.
Another benefit of this strategy is that Palantir has been able to talk about its bootcamp success stories during earnings calls and investor day presentations. As a result, the company has showcased myriad use cases across a variety of industry sectors to further underscore the growing popularity of its platform.
The valuation is compelling
Given the surge in share price, Palantir stock has admittedly gotten a little expensive. At a price-to-sales (P/S) ratio of 23.8, the stock is far from cheap. Benchmarking Palantir's valuation against other enterprise software-as-a-service (SaaS) peers makes its premium even more apparent.
Data by YCharts.
But if you look closely at the chart, you'll notice that Palantir's valuation multiple really exploded in mid-February following its blowout fourth-quarter earnings report and bullish outlook for 2024.
Palantir stands apart from many of its peers, however, by consistently reporting profits on a GAAP basis, in addition to meaningful margin expansion. The company grew adjusted free cash flow more than threefold last year to $731 million, and management believes it could rise again in 2024 to as much as $1 billion.
Should you buy the dip in Palantir stock?
Notable investor and Ark Invest CEO Cathie Wood recently spoke about Palantir during an interview, and she believes the company could be one of the most disruptive forces in AI in the long run. On top of that, Wedbush Securities analyst Dan Ives recently increased his price target for Palantir stock to $35 -- implying over 50% upside from current trading levels.
And yet over the last month, Palantir stock has dropped by roughly 13%. Furthermore, the stock is down a whopping 41% from its all-time high.
I'm not surprised to see the stock cool off a bit following its meteoric rise. Some investors are likely taking some gains off the table, while others may be hoarding cash as potential interest rate cuts loom from the Federal Reserve.
The overarching theme here is that some on Wall Street see more room for Palantir to grow. Given that last year marked the inception of Palantir AIP, I tend to agree with them and remain intrigued by the company's long-term potential.
Using dollar-cost averaging and employing a long-term investment horizon are prudent ways to mitigate risk when initiating or adding to existing portfolio positions. Palantir has made impressive progress to date, and the recent sell-off gives investors the opportunity to scoop up some shares on the dip.
