Palantir Technologies Inc. (ticker: PLTR) shares are up 160.7% through July 13 this year, giving shareholders a good reason to pop the bubbly heading into the second half of the year.
If you’ve missed the boat on Palantir, is it too late to hitch a ride?
For investors who focus on the right reasons — and yes, artificial intelligence fits into the equation — buying some shares of PLTR may be a green light.
But tread cautiously with Palantir, as the path forward depends on a few factors, some of which fall in the company’s favor.
While Palantir has made headlines in the AI market, the company’s bread and butter is machine learning, which is a subset of AI. The company specializes in proprietary database software that provides lightning-fast data analysis, such as its applications used on Ukrainian battlefields. It also counts the CIA as a client.
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PLTR operates in an enviable software market sweet spot, with a full client list in both the commercial enterprise and federal government sectors. About 60% of PLTR’s revenue comes from the federal government, used mostly for defense applications.
After years of losing cash, it posted a net income of about $31 million in the fourth quarter of 2022, as revenues rose by 18%. It then followed up with $17 million in net income in the first quarter of 2023, its second consecutive quarter of positive net income. What’s more, Palantir says it expects to generate a profit every fiscal quarter in 2023.
“The nature of PLTR’s business — government contracts within sensitive sectors — offers Palantir a competitive advantage,” says Michael Rechenthin, head of research and development at Tastytrade. “It’s not an easy space for newcomers, given the time it takes to obtain necessary clearances and trusts. Palantir has been a significant player in developing many of today’s technologies in this field.”
Getting Down to the Details
Getting a grip on Palantir’s stock means understanding what the company does.
“Palantir is a machine learning (ML) company that takes data and turns it into useable data, no matter the industry it is looking at,” says Glenn Tompkins, senior instructor at VectorVest in Cornelius, NC.
The company’s keystone software platforms — Gotham and Foundry — are cloud-based services that enable customers to collect and examine big data to make more precise operational decisions.
In fact, some of the company’s earliest software applications stemmed from U.S. intelligence services’ desire to track terrorist chatter and reveal areas of focus to protect the U.S. from potential attacks.
“Now Palantir has been able to expand its cloud-based information services to streamline a lot of different processes,” Tompkins notes. “That includes things like medicine to help with vaccines, fraud investigations and military defense, among other applications.”
So how does Palantir’s move into AI fit in with an ML company?
It’s all about data engineering, as Palantir was one of the first software companies to pounce on an opportunity to merge the two technologies, although it all started with the company’s investment in AI research two decades ago.
CEO Alex Karp acknowledged that commitment to AI and tied it directly to company profitability in a media statement following first-quarter earnings in March.
“We were profitable again this quarter … And we now anticipate that we will remain profitable each quarter through the end of the year,” Karp said. “The depth of engagement with and demand for our new Artificial Intelligence Platform (AIP) is without precedent.”
Now the company is making a move to merge AI with machine-learning data technologies.
“While PLTR is gaining recognition for its advancements in artificial intelligence, its core expertise lies in machine learning, particularly in the field of data harvesting,” says Jon Morgan, CEO at Venture Smarter, a consulting and financial analysis firm in Washington, D.C.
Palantir’s success in the ML space can be attributed to its robust data analytics capabilities, which enable it to extract valuable insights from large and complex data sets.
“This proficiency in ML has positioned Palantir as a leader in data-driven decision-making, empowering businesses and organizations to leverage their data effectively,” Morgan notes. “The strength of PLTR’s ML capabilities is a significant factor that influences the perception of its stock value.”
The company’s newfound profitability has helped brighten prospects after a long period of revenue instability. That’s provided some reassurance for investors who may have been worried about the bottom line.
“The market has recognized Palantir’s ability to generate consistent profits, which has contributed to the surge in its stock price,” Morgan says.
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Regulatory Issues on the Horizon
It appears Palantir has both the pedigree and enviable market position to warrant some buying activity.
Even so, some larger issues may give investors some pause.
“While PLTR has had a great run, it’s important to watch out for the macro indicators within the industry. In general, the AI industry is in the midst of a regulatory shift,” says Richard Gardner, CEO of Modulus, an AI systems developer in Scottsdale, AZ.
Yet the future remains uncertain for all AI software developers given the nascent evolution of AI and machine learning, especially from a government oversight standpoint.
“Over the coming quarters and years, regulators will be compelled to put up guardrails on the industry, and — depending on what those regulations are — companies could see major impacts almost overnight,” Gardner says.
For example, New York state has been in the news recently for a new regulation that requires an audit to determine if there is bias in AI hiring tools, Gardner points out.
“AI will continue to see new regulations pop up in jurisdictions around the world, so many of them will have to swiftly alter business models to comply with the coming regs,” he adds.
Other market mavens say that Palantir has a ways to go to prove its mettle — and its staying power.
Fear the FOMO?
“I’d caution investors against buying Palantir stock for the simple reason that this stock, and other AI-related stocks, are being driven to atmospheric values due to FOMO (the fear of missing out),” says Robert R. Johnson, professor of finance at Creighton University. “To quote Alan Greenspan, ‘irrational exuberance’ exists in the valuation of AI stocks.”
Historically, investors in innovation are often disappointed, and that may still be the case with PLTR.
“Arguably, the most important invention in the last century was the automobile,” Johnson says. “Yet, in the early part of the last century, there were 2,000 auto companies. If one had a crystal ball and knew at the time of the first cars how much this country would rely on automobiles, one would likely have invested heavily in the technology.”
As Warren Buffett once said at a shareholder meeting, of those thousands of companies, only three survived into the 21st century.
“Buffett said that at one time or another, all three were selling for less than book value, which is the amount of money that had been put into the companies and left there,” Johnson notes. “While autos had a tremendous impact on society, investors weren’t duly rewarded.”
Will that be the case with Palantir? Johnson leans that way.
“Value investors look at PLTR and see a company priced to perfection — or perhaps beyond perfection,” he says. “The firm is selling at a current price-to-sales ratio of 17.8 times, while the S&P 500 sells at a price-to-sales ratio of 2.6 times.”
“Yet you can’t value PLTR on a price-to-earnings basis because the firm has a history of losing money,” Johnson adds. “There is simply no margin of safety in considering PLTR stock. It’s an extremely speculative play.”
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Should You Buy Palantir (PLTR) Stock? originally appeared on usnews.com
