On Sept. 30, 2020, data analytics specialist Palantir Technologies (PLTR -2.01%) went public.
At the time, the investment community was pretty torn on Palantir's prospects. On one side of the equation, the retail investing community was enamored with it -- thanks in large part to the company's CEO, Alex Karp. But on the other side, institutional money managers and Wall Street analysts remained widely skeptical, with many referring to it as a consulting firm or government contractor, and less so as a technology innovator.
Over the last four years, Palantir has experienced many ups and downs. However, since the artificial intelligence (AI) revolution took the world by storm in late 2022, it has steadily climbed the ladder and emerged as a formidable leader in the space.
Below, I'm going to explain how Palantir catapulted to leadership of the AI pack and explore several catalysts that should help continue generating growth over the long run.
Palantir is sitting with some pretty exclusive company
In early 2023, Palantir made a chess move for the ages. The company released its fourth major software product, the Artificial Intelligence Platform (AIP). Through immersive seminars called "boot camps," prospective customers can demo AIP and identify uses for the company's software while figuring out how it can fit into their broader technology stack.
Over the last year and a half, AIP has become an absolute bellwether for Palantir, helping the company to reaccelerate its legacy government business by winning larger contracts, while simultaneously serving as a ticket into the private sector. AIP's widespread adoption has fueled a new phase of growth underscored by accelerating revenue, wider profit margins, and consistent positive net income and free cash flow.
For several quarters, some skeptics put forth the idea that the company was only benefiting from the AI frenzy, and that it's growth could very well contract should artificial intelligence wind up being a bubble.
But over time, this doubt-filled narrative has dissipated, and the business has finally joined some pretty exclusive company. For starters, it earned a spot in the S&P 500 earlier this year, and as of this writing, it is the best performing stock in the index in 2024.
The combination of an encouraging growth outlook and entry into the S&P 500 has fueled institutional buying in the stock -- adding a layer of legitimacy to the company beyond being a darling of the retail community.
More recently, Palantir switched from the NYSE to the Nasdaq. I think it is only a matter of time before the company joins another exclusive club: the coveted Nasdaq-100 index. Should this occur, it will be sitting among the world's leading growth stocks and technology companies in addition to the S&P 500, which I think will put it on even more radars.
Image source: Getty Images.
Big tech can't get enough of Palantir
One of Palantir's most subtle catalysts come from strategic alliances. While you may think that AIP has some intense competition, consider that many of the world's largest technology businesses are choosing to partner with Palantir as opposed to competing head-to-head.
Earlier this year, Microsoft and Oracle announced partnerships with Palantir, both of which will be integrating their respective cloud platforms with the company's foundational AI models.
And just last month, Amazon and Meta Platforms also announced their own partnerships with Palantir AIP.
I see big tech as a major contributor for Palantir's future as it looks to further penetrate core markets through AIP. Another way of saying this is that the boot camp strategy is only going to work for so long.
To me, the partnerships referenced above add another source of generating leads for Palantir -- and these sources of growth are so new that they are yet to really bear much fruit for the company as of now.
Valuation is my only hesitation
The one drawback I see with Palantir is its soaring valuation. At a price-to-sales ratio (P/S) of 66, it is the most expensive stock in the peer group listed below by a mile.
Moreover, the company has experienced an unprecedented level of valuation expansion over the last two months in particular -- mainly driven by an impressive third-quarter earnings report and more announcements of how big tech is turning to AIP for its own benefit.
PLTR PS ratio, data by YCharts.
Lucrative opportunities ahead fuel further upside
Investing in Palantir right now is a tough call. In fact, some of Wall Street's most respected hedge funds have been taking profits and reducing exposure to the stock as of late.
On the surface, I understand this approach. No stock moves up forever, and at some point, momentum just has to slow down. But at the same time, it's pretty clear that the company has some lucrative opportunities that aren't even accounted for in its actual growth yet.
I think a reasonable approach could be to dollar-cost average into the stock at different price points over a long time horizon. While I fully acknowledge that there are more reasonable entry points for the company's shares, I think there is more upside from the company's catalysts than there is downside in a sell-off -- should one occur at some point.
For long-term investors, I think Palantir is a no-brainer AI opportunity and deserves a spot in your portfolio heading into next year.
