Palantir Technologies (NYSE:PLTR) is a quality business that capitalizes on the potential of artificial intelligence. It’s been one of the top-performing AI stocks in 2023, with shares up 173%. Yet it’s also charged investors a significant premium for buying PLTR stock.
With shares trading at 60 times next year’s earnings estimates, 18 times sales, and 80 times the free cash flow it generates, it’s fair to ask if it’s worth the premium charged. The stock sits 20% off its highs, so let’s consider whether paying up for quality with PLTR stock is a smart investment.
Straddling the government and private sectors
Planatir’s valuation is growing for a reason. Big data and AI go hand in hand. The numbers-crunching Palantir performed early on when it was a little-known outfit running the data for the federal government’s three-letter spy agencies was a massive computational undertaking. AI opens up and scales its capabilities.
Even years after it began tapping the potential of private enterprise, the government remains PLTR’s most important customer. Segment revenues accounted for 55% of the total in the third quarter. It also just won a $250 million, three-year contract from the U.S. Army as it seeks to utilize and scale AI and machine learning potential.
Yet enterprise-scale customers are the real growth prize. Palantir witnessed a 37% increase in commercial clients for the period. It now has 181 enterprise customers that helped lift revenue 23% year over year in its fiscal third quarter. They’re finding Palantir’s new Artificial Intelligence Platform (AIP) allows them to merge data with logic to take action. It tripled the number of AIP users last quarter and has almost 300 organizations using AIP since it launched the platform six months ago.
Profitability now and in the future
It’s that kind of growth that sent Palantir’s stock soaring. It also sees the potential for AIP as being in just the top of the first inning. There is a massive runway for future growth. It’s already translating into profits.
Palantir has now been profitable for four consecutive quarters on a GAAP basis. The fourth quarter of 2023 should see it notch its first calendar year of profitability. Wall Street is looking for Palantir to post earnings of $0.25 per share this year compared to an $0.18 per share loss a year ago (on an adjusted basis, it was a $0.06 per share profit). They are forecasting it will grow to $0.29 per share next year. Analysts forecast revenue will expand from $1.9 billion last year to $2.2 million this year. It will increase to $2.7 billion in 2024.
Although that’s a compounded growth rate of 17% annually, it’s not as strong as expected from an AI growth stock trading at lofty valuations.
Paying up for quality
Wedbush analyst Dan Ives says Palantir Technologies is “the best pure-play AI name, in terms of them monetizing, not just on the government side but on the enterprise side when it comes to AI.” Its growth so far has been predicated on adopting its Foundry and Gotham platforms, the big data service options for enterprise and government, respectively. AIP is what will set Palantir apart.
Customers won’t need to settle for third-party platforms to run large language models like OpenAI‘s GPT-4. Instead, they can run them in-house on their private networks. It can analyze data in a matter of days, which used to take three to four months. That’s a sea change in how the customers will operate. It could lead to Palantir’s business growing faster than currently predicted.
Palantir is only just turning profitable, and the business has time yet to grow into its valuations. We are undoubtedly in nosebleed territory here, but PLTR stock may just be worth the price.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
