The S&P 500 (^GSPC -1.11%) is regarded by many as the best overall gauge of the U.S. stock market, as it includes the 500 largest publicly traded companies in the country. Given the breadth of businesses that make up the index, it is considered to be the most reliable benchmark of overall stock market performance. To be considered for admission to the S&P 500, a company must meet the following criteria:
- Be a U.S.-based company
- Have a market cap of at least $18 billion
- Be highly liquid
- At least 50% of its outstanding shares must be available for trading
- Must be profitable based on generally accepted accounting principles (GAAP) in the most recent quarter
- Must be profitable during the preceding four quarters combined
Palantir Technologies (PLTR -3.72%) is one of the most recent additions to the S&P 500, joining the benchmark on Sept. 23. That makes it one of only 11 companies to make the cut so far this year. Since the dawn of generative AI early last year, Palantir stock has surged 845%, as its expertise in the field drove robust revenue and earnings growth.
Given the stock's parabolic move higher, some investors are leery of Palantir's lofty valuation. However, one Wall Street analyst believes this is just the beginning. Let's take a look at what has fueled Palantir's epic run and if there's additional runway ahead for growth.
Image source: Getty Images.
AI isn't just for big tech
Palantir has been developing cutting-edge AI solutions for more than two decades. The company earned its pedigree devising sophisticated algorithms to serve the U.S. intelligence, military, and law enforcement communities. Its systems developed the uncanny ability to connect seemingly unrelated data to foil terrorist plots and bring wrongdoers to justice.
The company has expanded beyond its humble roots, bringing the same data mining know-how to enterprise. Palantir's AI and analytics systems dig through data and provide companies with solutions to real-world problems.
When businesses began clamoring for useable AI last year, Palantir was quick to develop its Artificial Intelligence Platform (AIP), a generative AI system that provided data-driven answers. The system leverages company-specific data to develop made-to-order solutions.
The numbers tell the tale
One of the primary stumbling blocks to adopting AI is that most companies lack the expertise to get started. Palantir developed a go-to-market strategy that takes that issue off the table. The company set up boot camp sessions that pair customer representatives with Palantir engineers to ensure they develop the AI solutions they need. This strategy has proven successful beyond the company's wildest dreams.
Palantir's quarterly report is teeming with customer testimonials detailing their success stories with AIP, and the evidence is clear. In the third quarter, Palantir closed 104 deals worth at least $1 million. Of those, 36 were worth $5 million or more, while 16 were worth at least $10 million. The company said that many of these agreements were consummated within just weeks of the customer attending a boot camp session.
Palantir's overall results paint a compelling picture. Revenue grew 30% year over year to $726 million, while also climbing 7% quarter over quarter. This also marked the company's eighth consecutive quarter of profitability, a streak that contributed to its acceptance into the S&P 500.
Perhaps more telling was Palantir's U.S. commercial revenue, including AIP, which grew 54% year over year, while its customer count grew by 77%. This helped the segment's remaining deal value (RDV) soar 73%. When RDV is growing faster than revenue, it provides insight into the company's future prospects -- which are rapidly improving. It also shows that Palantir is quickly moving beyond its reliance on government contracts.
While there's no consensus regarding the total addressable market for generative AI, the magnitude of the estimates can be instructional. In Ark Invest's Big Ideas 2024, Cathie Wood concludes that the AI software market could surge to $13 trillion by 2030. The bull case is even more mind-boggling, at $37 trillion. Given Palantir's expertise in the field and its success in helping customers implement AI solutions, it's clear that the company has a long runway ahead.
A bullish take
There's no denying Palantir's lofty valuation, which has Wall Street split. Of the 19 analysts that covered the stock in October, six rate it a buy or strong buy, seven label it a hold, and the remaining six rate it underperform or sell. What's almost universal among the bears is concerns about its valuation -- but looks can be deceiving.
The stock is currently selling for 160 times forward earnings and 40 times next year's sales. However, its forward price/earnings-to-growth (PEG) ratio -- which factors in Palantir's accelerating growth rate -- comes in at 0.5, when any number less than 1 is the standard for an undervalued stock.
I'm not the only one who believes the stock is still a buy. In the wake of its admission to the S&P 500, Greentech Research analyst Hilary Kramer opined that Palantir "easily can be" a $100 stock." That represents potential gains for investors of 65% compared to Wednesday's closing price.
The analyst cites Palantir's robust and accelerating revenue and profit growth and growing backlog as catalysts for a revaluation of the stock.
For investors still convinced Palantir is too expensive, dollar-cost averaging provides a mechanism to build a position over time, adding more shares when the multiple is more attractive.
To be clear, Palantir Technologies won't be a fit for every portfolio. However, for those with an appropriate investing time horizon -- and a cast-iron constitution -- Palantir is tapping a vast opportunity within the AI ecosystem, which could be extremely profitable for investors.
