In the ongoing artificial intelligence (AI) frenzy, mega-cap tech giants such as Nvidia (NVDA), Microsoft (MSFT), and Amazon (AMZN) aren't the only ones reaping the rewards. Newer entrants, such as Palantir Technologies (PLTR), are also gaining investors’ attention.
Palantir, founded in 2003, is emerging as a major player in the data analytics and software solutions industry. Palantir's core business primarily serves government agencies and large corporations. Last year, its strong financials sent the stock 167% higher, compared to a 25% return for the S&P 500 Index ($SPX). In 2024, PLTR is up 36.8% year-to-date, and Wall Street believes the stock has the potential to climb 49% higher in the next 12 months.
Recently, Palantir reported an impressive quarter. Given its streak of profitable quarters, Palantir is now eligible to be included in the S&P 500 Index, and some bullish analysts believe the stock's addition to the benchmark index is becoming imminent.
Let's look deeper into what's driving interest in Palantir's stock and what the future may hold for this outstanding growth stock.
Palantir’s Business Model Is Strong
Palantir's flagship product, the AIP, or Artificial Intelligence Platform, has gained significant traction since its launch in mid-2023. The platform uses AI, machine learning, and data visualization to extract actionable insights from vast datasets.
CEO Alex Karp highlighted that "momentum with AIP is now significantly contributing to new revenue and new customers" for the company. The company unveiled 20 plus new customers & partners for AIP at AIPCon last week.
Government contracts provide a significant portion of Palantir's revenue. However, the company has expanded to include commercial clients from a wide range of industries, such as defense, healthcare, finance, and manufacturing. This diverse client base allows Palantir to lessen dependency on any single sector and mitigate market risks.
Specifically, Palantir’s Gotham platform is used by government and intelligence-related cases, whereas the Foundry platform is used by commercial enterprises.
In the recent fourth quarter, government revenue stood at $324 million, an 11% increase year-over-year, to account for 54% of its total revenue. The total for the year was $1.2 billion.
Aside from the ongoing three-year contract worth $250 million with the Department of Defense, the company has other agreements with foreign government agencies.
As for its commercial segment, which accounts for 46% of revenue, Palantir reported impressive growth in Q4. Revenue of $284 million increased by 32% year-over-year. The U.S. commercial market reported a staggering 70% increase in revenue, reaching $131 million.
Significantly, Palantir also reported its fifth consecutive GAAP profitable quarter in Q4.
How Is 2024 Shaping Up?
Recently, the company signed another $178.4 million deal with the U.S. Army to develop and deliver the Army’s next-generation Tactical Intelligence Targeting Access Node (TITAN) ground station system. Furthermore, Palantir has entered into another demining partnership with Ukraine's Ministry of Economy.
One major advantage of government contracts is that they are secure and long-term. This enables Palantir to maintain a consistent revenue stream while also developing strong customer relationships.
Elsewhere, strategic collaborations with CAZ Investments and PwC will benefit the commercial segment in the coming quarters. Management is optimistic about the U.S. commercial market, which is expected to grow 40% by 2024, reaching $640 million.
In 2023, total revenue increased 17% to $2.23 billion. Looking ahead, management anticipates total revenue of $2.65 billion to $2.69 billion in 2024. Analysts expect revenue growth of 20.4% to $2.68 billion and earnings growth of 30.6% to $0.33 per share in fiscal year 2024.
Palantir's revenue and earnings are expected to increase by 20.4% and 20.3%, respectively, in 2025. Trading at 62 times forward earnings and 16 times forward sales, many analysts find the stock overvalued.
On the balance sheet, it was impressive for a small company to have $3.7 billion in cash, cash equivalents, and short-term U.S. treasuries at the end of 2023. Furthermore, Palantir had $731 million in adjusted free cash flow (FCF) in 2023 and plans to generate around $800 million to $1 billion this year.
In the last three months, analysts have revised Palantir's earnings estimates upwards by 16 times, while there have been 12 upward revisions for revenue estimates. A revision in estimates usually signals faith in the company's products and management's efforts to drive growth.
What Does Wall Street Say About PLTR Stock?
Recently, Jefferies analyst Brent Thill maintained his “hold” rating on the stock, setting a target price of $22. The analyst is concerned about the stock's high valuation, but he is impressed with the AIP platform and Palantir's positive growth trajectory.
Similarly, Citi reiterated its "hold" rating for PLTR, with a $20 target price. The analyst believes the company's new deal with the US Army as part of the TITAN program will provide a positive boost to its government revenue.
Despite the company’s outstanding growth potential, Wall Street has a cautious outlook for the stock, rating it a “hold" overall. Out of the 14 analysts covering PLTR, two rate it a “strong buy,” one suggests a “moderate buy,” six rate it a “hold",” one recommends a “moderate sell,” and four analysts rate it a “strong sell.”
Palantir closed Friday north of its its mean target price of $20.67. However, its high target price of $35 implies an upside potential of 48.9% over the next 12 months.
An Outstanding Growth Stock To Buy Now
Investors who believe they missed out on the big players in AI can still profit by investing in smaller companies like Palantir, which is currently trading at around $24 per share.
The AIP platform may take time to reveal its full potential before becoming "the dominant platform for the entire industry," as CEO Alex Karp anticipates. There are additional benefits that outweigh PLTR's high valuation. Its sturdy balance sheet, exceptional revenue and earnings growth, and strategic partnerships all make for a compelling investment case. Furthermore, potential inclusion in the S&P 500 could boost the stock price.
Despite skepticism about Palantir's high valuation, I believe the company is an excellent long-term investment.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
