The Nasdaq Composite is a comprehensive technology-focused index that tracks the performance of more than 3,000 stocks listed on the exchange. Earlier this month, the index hit (another) all-time high, marking the 27th so far this year. After its recent sprint higher, the Nasdaq is taking a well-deserved respite, down about 1% from its peak (as of this writing). Some investors are concerned that the rally has lost its momentum, but many on Wall Street believe the bull market still has room to run.
Palantir Technologies(NASDAQ: PLTR) is the most recent addition to the Nasdaq, joining the tech-centric index on Nov. 26. This follows the company’s recent admission to the S&P 500, making it one of just 11 companies afforded that honor so far this year.
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The decision came down to performance. Since the advent of generative AI early last year, Palantir stock has surged 930% (as of market close on Wednesday), as its AI expertise fueled robust revenue and profit growth.
Given the stock’s parabolic move higher, some investors are leery of Palantir’s sky-high valuation. However, a couple of Wall Street veterans have recently chimed in and believe there’s still upside ahead. Let’s look at the catalyst that sparked Palantir’s sprint higher and see if there’s additional growth on the horizon.
Image source: Getty Images.
Palantir has been at the forefront of AI technology for more than 20 years. The company’s expertise came from crafting novel AI solutions for U.S. intelligence, military, and law enforcement agencies. The ability of its systems to make connections between seemingly unrelated data points helped thwart terror plots and bring criminals to justice.
The company realized the value of its algorithms and quickly pivoted to embrace enterprise-facing applications as well. Palantir’s data mining and analytics software sifts through data, providing companies with actionable intelligence.
When AI went viral early last year, many businesses were eager to adopt these cutting-edge algorithms and benefit from the promises of improved productivity and increased profits. However, many lacked the necessary expertise needed to bring these technological advancements to bear. Seeing an opportunity, Palantir created its Artificial Intelligence Platform (AIP), a generative AI system that provides solutions based on company-specific data and situational analysis.
In a demo video, Palantir illustrates how AIP leverages company-specific information to help a manufacturing company minimize the impact of a hurricane hitting its distribution center. The AIP terminal examines existing orders, suggesting which ones to delay, cancel, or accelerate, and which shipments can be handled by other distribution centers. It also estimates the impact of those actions on the company’s sales, order backlogs, and profits.
To demonstrate the value of its offerings, Palantir hosts boot camps. In these hands-on sessions, customers are paired with Palantir staff to develop applications to solve real-world problems.
Palantir’s results show this strategy has struck a chord with users. In the third quarter, the company signed 104 deals valued at least $1 million. Of those, 36 brought in at least $5 million, and 16 were worth $10 million or more. Perhaps more telling is that many contracts were signed within weeks of attending a Palantir-hosted boot camp.
The overall results tell the tale. In the third quarter, Palantir’s revenue of $726 million grew 30% year over year. This marked the company’s eighth consecutive quarter of profitability, a major contributing factor in its admission into the S&P 500.
Palantir’s U.S. commercial revenue, which houses AIP, grew 54% year over year, while its customer count rose 77%. At the same time, the segment’s remaining deal value (RDV) soared 73%. When RDV is growing faster than revenue, it shows an upward trajectory of future growth.
The company’s AI expertise and innovative training sessions illustrate why Palantir is a leader in its field.
No discussion about Palantir would be complete without addressing its valuation. The stock is currently selling for 175 times forward earnings and 43 times forward sales, which appears ridiculously expensive — at least at first glance.
However, the most commonly used valuation metrics fall short when evaluating high-growth companies. Applying the more appropriate forward price/earnings-to-growth (PEG) ratio — which factors in Palantir’s accelerating growth rate — the valuation comes in at 0.45, when any number less than 1 is the benchmark for an undervalued stock.
Yet Wall Street remains divided. Of the 19 analysts who offered an opinion in November, four rate it a buy or strong buy, eight rate it a hold, and seven rate it underperform or sell.
That said, I’m not the only one who believes Palantir stock is a buy, and several Wall Street veterans have recently chimed in. Greentech Research analyst Hilary Kramer believes Palantir “easily can be” a $100 stock,” which represents potential upside of 51% compared to Wednesday’s closing price. The analyst believes the company’s accelerating revenue and profit growth will cause many on Wall Street to rerate the stock.
Just this week, Wedbush analyst Dan Ives called Palantir’s AIP strategy “game changing,” while maintaining an outperform (buy) rating and increasing its price target to $75, or roughly 14% upside from Wednesday’s closing price. BofA analyst Mariana Perez Mora also rates the stock a buy, boosting her price target to $75, calling Palantir “the enabler and winner in this new era,” going on to say it’s “poised to dominate.”
Those who believe the stock is still too expensive should consider dollar-cost averaging as a way to accumulate shares over time, while also getting a more attractive entry price.
To be clear, Palantir stock won’t be a fit for every portfolio, particularly those of value-minded investors. However, for those with the stomach for some risk and the potential for volatility, Palantir deserves a look as one of the few pure plays in AI delivering robust growth.
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Bank of America is an advertising partner of Motley Fool Money. Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Bank of America and Palantir Technologies. The Motley Fool has a disclosure policy.
