The emergence of artificial intelligence (AI) marked a major leap forward in technology, and the number of use cases for generative AI continues to grow. These sophisticated algorithms are being deployed to streamline business processes, increase productivity, and save money. As a result, businesses are scrambling to adopt these systems for fear of being left behind.
One of the undeniable beneficiaries of this trend is Palantir Technologies (PLTR 1.26%). The stock has climbed an incredible 2,250% since AI first went viral in early 2023 (as of this writing). However, the commensurate increase in the stock's valuation has raised concerns among investors.
Palantir is scheduled to report its fourth-quarter results after the market close on Monday, Feb. 2. Let's review the company's most recent results and what Wall Street is saying ahead of the big day.
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Decades of AI expertise
Palantir has been providing AI solutions to U.S. government agencies and allies for more than 20 years. However, it was the release of Palantir's Artificial Intelligence Platform (AIP) in early 2023 that was the catalyst for the company's explosive growth. The ability of this system to plug into a variety of enterprise business systems and provide keen insight and actionable intelligence made it a hit with enterprise users.
The coup de grace was Palantir's hands-on boot camps, which pair users with Palantir engineers. "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 unprecedented demand for AIP has taken Palantir's growth to the next level. In the third quarter, Palantir's revenue grew 63% year over year, while adjusted earnings per share (EPS) jumped 110%, but that's just the tip of the iceberg. Palantir's U.S. commercial revenue -- which includes AIP -- rose 121% year over year and 29% sequentially. Additionally, the segment's remaining deal value (RDV), which provides a foundation for future results, increased 199%.
Growth of that magnitude shouldn't be ignored, but there's a catch.
Does Wall Street think Palantir is a buy?
Palantir's technology is unmatched, and the company's execution has been enviable, but analysts remain bearish overall. The stock's blistering run has sent its valuation into the stratosphere. The stock is currently trading at 396 times earnings, putting Palantir's multiple in a class by itself.
As a result, most on Wall Street are taking a hard pass. Of the 26 analysts who offered an opinion on Palantir thus far in January, only six rate the stock a buy or strong buy, while 16 recommend holding, and four rate it underperform or sell. That means 77% don't think Palantir is a buy right now. Wall Street is nearly universal in its concerns for Palantir's lofty valuation, and it has been called the "most expensive stock in history."
NASDAQ: PLTR
Key Data Points
One dissenting voice is Bank of America analyst Mariana Perez Mora, who maintains a buy rating and a Street-high price target of $255 on Palantir. That represents potential upside for investors of 50% compared to Friday's closing price. The analyst says Palantir's AI system is "unmatched," and cites the company's accelerating revenue growth as evidence that it is the "stack of choice to implement AI at scale."
What to do?
The conundrum is that Palantir can continue growing revenue and profits, yet the stock can still fall, largely because of the company's lofty valuation. In fact, between 2021 and early 2023, Palantir lost more than 80% of its value, and a decline of that magnitude could happen again. So what's an investor to do?
If Palantir stock falls, and the likelihood of that is high, long-term investors will have the opportunity to pick up shares at a more attractive valuation. That's easier said than done, as the doomsayers will likely be out in force and even the most seasoned investors can second-guess themselves.
Another strategy is dollar-cost averaging, which allows investors to buy equal dollar amounts of the stock at regular intervals, thereby adding more shares when the price is lower and fewer when the price is higher.
In any case, investors will need an iron-clad constitution to face the volatility that's part of the cost of admission for Palantir shareholders. That said, I believe the stock will be worth much more 10 years from now.
