Shares of this data mining and AI software company can head even higher in the long run.
Shares of data mining and artificial intelligence (AI) specialist Palantir Technologies (PLTR 1.73%) have popped by an impressive 47% so far in 2024.
Palantir surpassed consensus revenue estimates and met the adjusted earnings-per-share estimates in the first quarter of 2024. Despite blockbuster numbers, the stock tanked by nearly 15% after releasing this quarterly result as investors were disappointed with the company's conservative revenue guidance for full-year fiscal 2024.
Since then, Palantir stock has gained back all of its losses, mainly driven by some recent profit-taking in semiconductor/AI stocks and market rotation from semiconductor stocks to software stocks. However, there is still a lot to like in this software-as-a-service (SaaS) player, known for its exceptional ability to mine mounds of government and enterprise data for actionable insights.
Here are three reasons investors should pick up a stake in Palantir now.
1. Unleashing the power of AI
Since its launch, Palantir's large language model-powered Artificial Intelligence Platform (AIP) has witnessed solid customer adoption. Leveraging data analytics and machine learning, AIP helps enterprises move "beyond chat" and deploy AI solutions effectively to drive real business value.
Palantir's AIP applies ontology and data integration technologies to enable customers to deploy AI solutions, even with messy underlying data. AIP helps convert unstructured data including emails, Slack messages, PDFs, comments, audio, and images into structured actions and outputs. This is in contrast to competitors who claim that only 10% of a customers' data is AI-ready.
Palantir's boot camp-based, go-to-market strategy is also proving a success. More than 900 organizations had participated in the bootcamps by the end of the first quarter. The company has also rolled out Build with AIP (tutorials and reference implementations) to enable customers to effectively use AIP for building AI solutions. Subsequently, AIP is helping Palantir with new customer acquisitions as well as expansions in existing customers.
Strong U.S. commercial business, and reacceleration in government business
The U.S. commercial business was undoubtedly the star performer for Palantir in the first quarter, growing revenue by 68% year over year, excluding strategic investments. This trend is expected to continue in 2024, driven mainly by the increasing adoption of the company's AIP platform. Palantir noted a robust 69% year-over-year U.S. commercial customer count in the first quarter. Not surprisingly, the company has increased its full-year fiscal 2024 growth outlook for this customer cohort from the previous estimate of 40% to 45%.
Palantir's U.S. government business also demonstrated strength, with revenue growing 8% year over year in the first quarter, an acceleration from 3% year-over-year growth in the previous quarter. The company secured over $178 million from the U.S. Army for a project under the Tactical Intelligence Targeting Access Node (or TITAN) program, enabling it to help the army detect enemy targets.
The project has made the company the first software company to be awarded a prime contract (direct contract with the government agency) for a hardware production project. By positioning itself as a "software prime," Palantir may witness even more opportunities in the U.S. defense sector.
Government business involves significant vetting of vendors and is inherently sticky. Hence, although this business is growing more slowly than the commercial business, it provides a stable revenue base for Palantir. Furthermore, in the current era of geopolitical tensions, Palantir's government-focused software solutions have become even more relevant and may see robust growth in the coming years.
Impressive financials
Investor reaction to Palantir's fiscal 2024 revenue guidance seems short-sighted since the company's top-line growth will likely be lumpy in the early stages of the ongoing AI transformation. The company's financial performance will become increasingly more predictable, with the advancement and adoption of AI technologies worldwide.
Nevertheless, Palantir's profitability has been improving at a steady pace. The company recorded a generally accepted accounting principles (GAAP) net income of $106 million in the first quarter, marking its sixth consecutive quarter of GAAP profitability. The company also reported a GAAP operating income of $81 million and an adjusted operating margin of 36%. Palantir's Rule of 40 score (an indicator of the company's revenue and profit performance) also rose from 54 in the fourth quarter of 2023 to 57 in the first quarter of 2024.
Palantir is also generating cash at a robust pace. The company reported $130 million in cash from operations and $149 million in adjusted free cash flow in the first quarter. It ended the first quarter with $3.9 billion in cash, a resource that gives it sufficient financial flexibility to invest in growth initiatives.
Trading at 24 times trailing-12-month sales, Palantir stock is not cheap. However, the premium valuation seems justified considering the mission-critical nature of its software in multiple government operations and the rapidly expanding commercial business. Hence, it makes sense to invest in this high-flying stock now.
Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
