There's little question that artificial intelligence (AI) is causing a paradigm shift in the technology landscape. Recent advances have the potential to significantly enhance and increase workplace productivity by streamlining and automating time-consuming tasks, saving businesses time and money. The resulting windfall is expected to add trillions of dollars to the economy, sparking an AI gold rush in response. The problem for most companies, however, is knowing where to start and how to adopt these next-generation algorithms.
That's where Palantir Technologies (PLTR -2.52%) comes in. The company has been creating custom AI solutions for the U.S. government and its allies for more than 20 years and more recently developed systems specifically designed for enterprise-level businesses.
Decades of expertise in the field gave Palantir an edge when generative AI burst on the scene early last year. The company was quick to develop an original go-to-market strategy that gives businesses the tools they need to develop AI solutions that solve real-world problems. This strategy is already fueling the next stage of Palantir's growth, attracting new customers by leaps and bounds.
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Generative AI 101
While experts generally agree that AI can dramatically improve productivity, many businesses are still unclear as to how this process will benefit them. Earlier versions of AI are already being used behind the scenes every day. Some instances include product recommendations for online shoppers, surfacing appropriate content on social media, and music and movie suggestions on streaming services. It also drives the digital voice assistants on your smartphone, underpins smart home devices, and even powers internet searches.
The next generation of these systems, generative AI, can create new content, and automate a great many recurring tasks, boosting productivity along the way. These groundbreaking systems can create presentations from existing data, summarize emails and draft responses, search for data on the internet or among company files, create various charts from spreadsheet data, and more.
The implications are clear. By decreasing the amount of time needed for mundane chores, generative AI frees up staff to handle higher-level tasks. And as the old saying goes, time is money.
Teach a person to fish
One of the biggest stumbling blocks to adopting these solutions is that most businesses simply don't know where to begin. They are more likely, however, to be able to identify real-world problems they face every day. Palantir helps businesses pinpoint these issues and adopt customized solutions.
There's an old saying that helps illustrate Palantir's process: "Give a person a fish, they eat for a day. Teach them to fish, they eat for a lifetime." That's what makes the company's solutions so novel. Rather than giving them a fish, Palantir teaches them to fish.
How, you ask? Though intensive, hands-on workshops or "boot camps." Palantir developed its Artificial Intelligence Platform (AIP), which helps users quickly develop "high-value" use cases. These boot camps provide "immersive, hands-on-keyboard sessions [that] allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations." This helps businesses "go from zero to use case in just one to five days." The company has a "growing backlog of AIP Bootcamps due to the overwhelming demand."
The company was taken aback by the sheer level of interest in these sessions. Back in October, management planned to host 500 boot camps over the course of the coming year, but demand was off the charts. In the first quarter alone, Palantir conducted 660 such conferences, dramatically increasing its enterprise customer base along the way. Chief revenue officer Ryan Taylor laid out some of the tangible benefits during the company's earnings conference call:
As one example, a leading utility company signed a seven-figure deal just five days after completing the boot camp. Another customer immediately signed a paid engagement after just one day of their multi-day boot camp and then converted to a seven-figure deal three weeks later.
He went on to point out that U.S. commercial revenue grew 40% year over year, despite the first quarter being Palantir's seasonally slowest. As a result, U.S. commercial customers surged 69% year over year. The company boosted its full-year forecast, calling for revenue growth of at least 45% for the segment, up from its previous guidance, which called for 40% growth.
Bears were quick to point out that 40% growth was down from 70% sequentially, but that's explained by seasonality and the lumpiness inherent in closing these types of deals in an uncertain economy. The coming quarter will mark an important test for Palantir, showing whether to low-hanging fruit has already been picked or if the AI revolution is only just getting started. To me, the evidence suggests the latter is true.
Is the stock a buy?
Palantir has been on a tear, with the stock up 232% since the start of 2023. The company's strong financial results and the accelerating adoption of AI are fueling that surge. As a result, the valuation has also surged, so it won't be suitable for every investor.
The stock is currently selling for 65 times forward earnings and 15 next year's sales, which is enough to send value investors running for cover. However, those multiples fail to take into account Palantir's accelerating growth. The more appropriate forward price/earnings-to-growth (PEG) ratio -- which factors in that growth -- reveals a multiple of less than 1, which is the standard for an undervalued stock. Still, the stock won't appeal to every investor.
That said, for investors willing to take a little additional risk for a pure play in the AI space, a modest position in Palantir Technologies could pay big rewards.
