Since the advent of artificial intelligence (AI) early last year, the number of use cases has continued to soar. The ability of these advanced algorithms to streamline processes and increase productivity has companies of all stripes looking for ways to adopt generative AI, integrate it into their businesses, and reap their part of the expected financial windfall.
One of the clear and certain beneficiaries has been Palantir Technologies (PLTR -0.68%). The stock is up more than 287% so far this year (as of this writing) and up 934% since AI first went viral in early 2023. However, the soaring stock price has been accompanied by a commensurate increase in Palantir's valuation, which has made some investors justifiably nervous.
Yet there could be another catalyst just over the horizon. Below I'll look at what has fueled Palantir's recent success, the potentially important milestone ahead, and what the collective wisdom of Wall Street says.
Image source: Getty Images.
Decades of AI expertise
Palantir is a relative Johnny-come-lately on the Wall Street scene, but the company has been working in the shadows developing cutting-edge AI solutions for two decades. Palantir was the brainchild of Peter Thiel, who envisioned an AI-based system that could gather data from siloed intelligence systems, connect seemingly random bits of information, and uncover potential terrorist plots to prevent tragedies like 9/11. From that dream, Palantir was born.
It didn't take long for the company to discover that these same advanced algorithms could be used on any number of business challenges, delving deeply into corporate systems and thereby uncovering valuable insight and providing actionable intelligence.
However, the revolutionary development came with the dawn of generative AI. Palantir quickly pivoted to develop its Artificial Intelligence Platform (AIP), which leverages AI to make company data more useful to enterprises. By scouring internal information, AIP can solve company-specific problems, unearthing answers that managers might otherwise miss.
In a brilliant move, Palantir paired this system with hands-on training sessions, dubbed boot camps. "These immersive, hands-on sessions allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations," Palantir said.
The unbridled success of AIP can't be overstated. In the third quarter, the company's revenue grew 30% year over year, while adjusted earnings per share (EPS) jumped 43% -- but the devil is in the details. Palantir's U.S. commercial revenue, which includes AIP, rose 54%, while the segment's customer count jumped 77%. Additionally, the segment's remaining deal value (RDV) -- which highlights the likely trajectory of future results -- increased 73%.
A strategic shift
Last month, Palantir announced it was transferring its stock to the Nasdaq exchange. At the time, it noted, "Upon transferring, Palantir anticipates meeting the eligibility requirements of the Nasdaq-100 Index."
While this might sound like a non-event, it could be the catalyst that boosts the stock once more. Investors may recall there was a great deal of excitement when Palantir was selected for inclusion in the S&P 500 in late September.
Many investors view this as a validation of their investing theses, as the companies selected must meet certain profitability and liquidity criteria. Furthermore, exchange-traded funds (ETFs) and other passive-investment vehicles that track these indexes must buy shares in order to mimic the returns of the index in question.
The annual rebalancing of the Nasdaq-100 index is scheduled to be announced on Dec. 13, with changes to take place on Dec. 20. Many on Wall Street believe Palantir tops the list for inclusion. If Palantir becomes part of the Nasdaq-100 index, the stock could once again get a boost.
NASDAQ: PLTR
Key Data Points
Does Wall Street think Palantir is a buy?
Despite Palantir's brilliant execution and accelerating financial results, many on Wall Street are bearish on the stock, and their reasoning is understandable. The parabolic move in the stock price has come with a commensurate increase in its valuation. The stock is currently trading for 175 times forward earnings and 44 times forward sales (as of this writing), which is lofty by any stretch of the imagination.
However, these metrics fall short when evaluating a high-growth stock like Palantir. When measured using the more appropriate forward price/earnings-to-growth ratio (PEG) -- which factors in Palantir's surging growth -- its valuation clocks in at 0.58, when any number less than 1 is the standard for an undervalued stock.
Still, many on Wall Street are taking a pass. Of the 19 analysts who offered an opinion on Palantir so far in December, only four rate the stock a buy or strong buy, while eight recommend holding, and seven rate it underperform or sell. That means 79% don't think Palantir is a buy right now.
One representative take was issued by Jefferies analyst Brent Thill. The analyst calls Palantir the "most expensive" stock in software, a sentiment echoed by many of his colleagues. He also warns of tough comps ahead.
That said, the analyst issued a rare mea culpa, writing, "We underestimated the momentum that [Palantir] was able to garner after the launch of Artificial Intelligence Platform (AIP) boot camps," he wrote, citing the company's multiple-quarter stretch of accelerating growth. Argus Research analyst Joseph Bonner echoed his concerns, noting, "The market tends to punish highly valued tech stocks."
That said, Wedbush analyst Dan Ives maintains an outperform (buy) rating and recently boosted his price target to $75, representing potential upside of 13% (as of this writing). He said the company's AIP boot-camp strategy is "game-changing." BofA analyst Mariana Perez Mora concurs, rating the stock a buy with a $75 price target, saying Palantir is "poised to dominate."
Those bulls aside, the consensus is clear. Wall Street believes Palantir stock is too expensive, and any failure on the company's part -- real or imagined -- could send the stock plunging.
Here's the thing...
Investors who already own Palantir stock (like I do) should adopt and maintain a long-term approach to investing and hang on for dear life. It's clear that Palantir has an AI solution that speaks to customers, and given the accelerating adoption of AI, that will likely continue. However, there will certainly be bumps in the road.
For investors who feel the train has left the station, take heart. One effective strategy is to buy a small stake in Palantir and watch for future opportunities to add at better value points. If that stock falls in the future -- which is almost certainly the case -- astute investors will have the opportunity to add to their positions at a more attractive valuation.
Dollar-cost averaging is another helpful strategy, which helps investors build a position over time, adding more shares when the price is lower and fewer when the valuation is higher.
Investors will benefit from a long-term outlook but will need a strong constitution to withstand the volatility that will no doubt be part of Palantir's future.
