The rise of artificial intelligence (AI) is changing many aspects of our lives. Although still evolving, generative AI is rapidly advancing, leading to numerous practical applications.
One major player benefiting from these developments is Palantir Technologies (NYSE: PLTR). This year alone, the stock has surged over 240% and skyrocketed by 820% since the buzz around AI began in early 2023. Such dramatic gains have understandably raised concerns about its valuation among investors.
This article explores the reasons behind Palantir’s success, insights from Wall Street analysts, and whether this stock is a good investment at the moment.
Image source: Getty Images.
Capitalizing on AI Innovations
Palantir was established in the aftermath of the 9/11 attacks, driven by the idea that fragmented intelligence data might have helped prevent the tragedy. Founder Peter Thiel aimed to create a system that could aggregate data from various sources and utilize advanced algorithms to connect seemingly unrelated information, thereby identifying potential threats earlier. Serving U.S. intelligence agencies and allies, Palantir became an essential tool for security operations.
Over time, the company expanded its focus beyond defense. It now harnesses the AI expertise it developed to assist businesses in leveraging data analytics to derive practical insights.
A significant breakthrough occurred when Palantir launched its Artificial Intelligence Platform (AIP) last year. This platform employs generative AI to enhance its systems, allowing companies to utilize their existing data to solve specific challenges effectively.
In a demonstration, Palantir showcased how AIP can help companies manage production schedules during a hurricane. The system evaluates existing orders, recommending which to prioritize, postpone, or cancel while also considering potential impacts on overall profits and backlogs.
Additionally, Palantir has eased the integration of AI solutions by providing boot camp sessions. As stated by the company, “These immersive, hands-on sessions allow new and existing customers to build live alongside Palantir engineers.” This approach has resulted in heightened demand for boot camps, driving faster conversions of AIP agreements.
Palantir’s recent performance reflects the success of AIP. In the third quarter, the company reported a 30% increase in year-over-year revenue and a 43% rise in adjusted earnings per share (EPS). Notably, U.S. commercial revenue, which includes AIP, surged by 54%, with a 77% increase in customer count and a 73% rise in remaining deal value.
Analysts’ Perspectives
Palantir’s impressive stock surge has raised concerns about its high valuation. Currently, the stock trades at 157 times forward earnings and 39 times forward sales, which many consider excessive.
This valuation has caused hesitation among analysts. Out of the 20 analysts tracking Palantir, only four advocate for a buy or strong buy rating, while 10 suggest holding, and seven classify it as a sell.
Jefferies analyst Brent Thill recently expressed concerns over Palantir’s high valuation. While acknowledging the company’s robust sales growth, he contends that Palantir would need to achieve 40% year-over-year revenue growth for the next four years to justify its current price. Argus Research analyst Joseph Bonner shares a similar viewpoint, highlighting that any hiccup in Palantir’s growth could result in significant market backlash, especially given the stock’s high valuation.
Conversely, Greentech Research analyst Hilary Kramer believes Palantir has the potential to reach $100 per share, arguing that Wall Street needs to recognize the company’s accelerating growth trajectory.
The overall consensus on Wall Street remains a hold rating, cautioning potential investors to tread carefully before making purchases. Analysts point out that any underperformance, even speculative, could significantly impact the stock’s price.
What does this mean for investors concerned about missing out on potential growth? While I see promise in Palantir’s future, I am cognizant of the volatility that could arise, especially following this year’s extraordinary 800% rise in share price.
In such scenarios, I tend to invest a small amount initially. This approach allows me to monitor the stock’s performance and consider adding to my position if valuations become more favorable. Employing dollar-cost averaging is also a wise strategy, enabling investors to accumulate shares over time by purchasing more when prices drop and less when they rise.
If growth continues for Palantir — which I strongly believe it will — investors may want to claim a portion of this compelling story. However, it’s crucial not to overcommit financially.
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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. For more details, see the Motley Fool disclosure policy.
The views and opinions expressed herein are those of the author and may not reflect those of Nasdaq, Inc.
