The “Magnificent Seven” tech giants, including Microsoft, Alphabet, Amazon, Apple, Nvidia, Meta, and Tesla, have dominated the conversation around artificial intelligence (AI) for quite some time. These companies, with their vast resources and cutting-edge technologies, are often considered the top players in the AI arms race. However, there are other opportunities outside of these megacap tech stocks that savvy investors recognize.
One such company that has recently entered the AI race and attracted attention is Palantir Technologies. This tech stock has been a polarizing figure on Wall Street, with skeptics viewing it as nothing more than an IT consultant for the public sector due to its close ties with the U.S. government. However, one analyst, Dan Ives of Wedbush Securities, is bullish on Palantir and its AI capabilities.
Ives has dubbed Palantir the “Messi of AI,” drawing a parallel to soccer superstar Lionel Messi. Following the company’s impressive fourth-quarter earnings report, Ives upgraded his price target to $30, indicating a potential 40% upside from the stock’s trading levels as of February 7.
To understand why Ives is so optimistic about Palantir and its AI potential, let’s take a closer look at the company’s business and how it disrupts the pursuit of AI by big tech companies. Additionally, we’ll examine its valuation compared to its peers to determine if now is a lucrative opportunity to invest in the stock.
In 2023, Palantir experienced a remarkable run. The company sells its software products under three labels: Foundry, Gotham, and Apollo, which assist in complex data analytics for large enterprises. In April, Palantir unveiled its fourth flagship product, the Palantir Artificial Intelligence Platform (AIP). While this release may have been overshadowed by the aggressive moves of big tech companies in the AI sector, Palantir started hosting “boot camps” to showcase its software and generate sales leads.
The strategy paid off, as Palantir’s customer base grew by 35% year over year in 2023, with significant penetration into the private sector. The company’s commercial customer count experienced a 44% year-over-year growth, and revenue from U.S. commercial customers specifically increased by 70% in the fourth quarter. This transformation from primarily a government contractor to a diversified developer of enterprise software demonstrates Palantir’s potential in the AI field.
Financially, Palantir’s performance is impressive. Despite operating in a volatile market, the company saw a top-line growth of 17% year over year in 2023. It reached $1 billion in revenue for the first time in 2020, and just three years later, it surpassed $2 billion. Furthermore, Palantir’s operating margin expanded from 22% to 28% in 2023, resulting in a 260% year-over-year increase in free cash flow, reaching $730 million.
Although Palantir’s valuation might seem high compared to some of its peers, with a price-to-sales (P/S) ratio of 25.7, it’s essential to note its recent surge in valuation following the release of its fourth-quarter earnings. Attempting to time the market by waiting for a dip can be challenging, and instead, a strategy of slowly accumulating shares through dollar-cost averaging might be more prudent in the long term.
Looking ahead, Palantir’s future appears bright. The company’s focus on customer acquisition through boot camps and its confident long-term strategy indicate a potential for significant revenue acceleration in the coming years. Additionally, Palantir’s strong financial profile, consistent profitability, and potential inclusion in the S&P 500 could attract institutional investors seeking exposure to AI.
While Palantir is a growth stock and may experience volatility, its performance in 2023 and its emergence as an AI leader suggest that now could be an opportune time for both new and existing investors to consider investing in the company. As the benefits of AI-powered services continue to unfold, Palantir’s position in the market looks promising, making it a stock to watch in the AI space.
Disclaimer: The author of this article has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool owns positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
