The artificial intelligence boom has helped many tech stocks, including Palantir Technologies, produce market-beating returns.
While the S&P 500's 10% first-quarter return is nothing to sneeze at, Palantir shares surged 34%. Its shares also substantially outperformed the benchmark index over the past year, returning 172% since March 2023. Meanwhile, the S&P 500 is up about 29%.
Those extraordinary gains likely surprised many investors who were concerned that the Peter Thiel-founded company would struggle because the possible recession and congressional wrangling over the debt ceiling would dent demand.
However, where others saw risk, TheStreet Pro's Stephen Guilfoyle saw an opportunity. He bought shares when they were trading below $10 in April 2023, allowing him to profit handsomely from surging optimism over AI spending.
Given Palantir's shares rocket-ship ride higher and a current price near $23, Guilfoyle has updated his analysis and stock price target.
Palantir's demand driven by AI wave
Guilfoyle's purchase of Palantir stock last year was based on its strong, debt-free balance sheet, improving free cash flow, and a clearer pathway to profit growth.
The highly successful launch of OpenAI's ChatGPT in December 2022 has proven to be a boon for the company, making Guilfoyle's prediction prescient.
Interest in using AI to digest, interpret, and create new insights from siloed data has swelled across most industries, resulting in the most rapid research and development since the Internet Age in the 1990s.
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Banks are using AI programs to hedge risks, evaluate loans, and price products. Drugmakers are exploring its use in predicting drug targets and clinical trial outcomes. Manufacturers are evaluating if it can boost production and quality. AI may also help retailers forecast demand, manage inventories, and curb theft.
AI's widespread applications seem boundless, which has led many companies and governments to turn to Palantir's deep expertise in managing and protecting data for help in training and running new AI apps.
Palantir's (PLTR) roots stretch back to helping the U.S. government design systems for counter-terrorism. Its Gotham platform continues to assist governments in those efforts today. It also offers solutions that manage, interpret, and report data across enterprise and cloud networks to large companies too.
Its deep data experience positioned it perfectly to help customers design large language models and other AI solutions using its AI platform (AIP).
"The demand for [Artificial Intelligence Platform] AIP is unlike anything we have seen in the past twenty years," said CEO Alan Karp last summer. "We are currently in discussions with more than three hundred additional enterprises to deploy AIP within their organizations, all of which are searching for an effective and secure means of adapting the latest large language models for use on their internal systems and proprietary data."
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Karp's optimism appears to have been well-placed. Palantir's year-over-year sales growth has exceeded 20% in each of the past three quarters, and its earnings per share growth in each of those quarters has been in the double-digit percentages.
Revenue totaled $736 million and earnings per share were 9 cents in the fourth quarter, up 21% and 16% from the previous year.
Wall Street analysts think Palantir's profit growth will continue. The consensus analyst estimate for earnings in 2024 and 2024 is 33 cents and 39 cents, respectively, an increase of 34% and 17%.
Palantir pause may set up another opportunity
Initially, Guilfoyle's Palantir stock price target was $12. However, he bumped that target to $18 last June, $20 last July, and $22 last August.
Shares eclipsed $22 in February, reaching a high of $27.5 in early March. Since then, they've retreated about 16% to $23.
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Guilfoyle thinks Palantir's pullback may be creating another upside opportunity for investors.
"Palantir is on sale and I'm buying for future generations," wrote Guilfoyle recently. "Palantir remains a top-15 long-side allocation for me."
The biggest knock against Palantir is its valuation.
The company's shares aren't cheap by most metrics and boast a sky-high price-to-earnings (P/E) ratio, a fact that Guilfoyle concedes.
"The stock trades at 74 times forward-looking earnings (probably a little less now), 25 times sales, and 15 times book," said Guilfoyle.
Tech stocks are known for trading at higher valuations because of their faster growth rates. Still, Palantir's P/E is significantly higher than that of many companies in the sector. For example, Nvidia and Advanced Micro Devices, two other AI stock beneficiaries, have forward P/E ratios of 38 and 56.
Nevertheless, Guilfoyle thinks Palantir's got enough going right for it to deserve a premium valuation. In his words, it has a "fortress-like balance sheet" and substantial operating cash flow.
Operating cash flow exceeded $700 million in the past 12 months, and its current ratio, a measure of its ability to pay short-term liabilities with short-term assets, is 5.5, giving it plenty of financial firepower to take advantage of the AI opportunity.
Guilfoyle believes shares will trade higher since the AI spending trend appears to have multi-year legs. His price target is $27.
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