1 AI Stock To Sell Fast?
Can the hype surrounding AI keep boosting the performance of Palantir Technologies (PLTR) shares, or is it time for the stock to pull back?
Since the stock began trading on September 30, 2020, it has gained about 160%. Over the past year, it has returned more than 185%. To put this into context, the S&P 500 index gained more than 50% since Palantir started trading and more than 25% over the past year.
Given such a skyrocketing rally, how far up can the stock go?
Growth Prospects
Palantir was founded in the early 2000s as a company building software platforms for the U.S. intelligence community to assist them in counterterrorism operations. Nowadays, the company’s Gotham and Foundry platforms are used by governments worldwide for protection against evolving threats to national security.
In recent years, Palantir Technologies has also started commercial applications, serving leading commercial institutions. As of year-end 2023, the firm has 497 customers, including those in the commercial sectors and government agencies, indicating that 130 customers were added over the course of 2023.
This Silicon Valley software powerhouse is aggressively trying to grow its revenue from commercial clients and boosting its presence across several industries. In 2021, Palantir Technologies reported that its software was used in more than 50 different industries worldwide. The number grew to 60 in 2022 and 80 in 2023.
Palantir’s reliance on its commercial segment is also rising steadily. In 2021, 42% of its revenue came from the commercial segment customers. The contribution increased to 44% in 2022 and 45% in 2023.
How is AI Helping Palantir Technologies?
ChatGPT showed the world the power of Artificial Intelligence (AI). With its release in 2022, the stage was set for rapid growth in the sector due to heightened investor interest and increased expenditures to kick-start AI operations in companies looking to leverage its prowess.
AI shows hefty prospects for this decade. In 2021, the global AI market was worth around $100 million. With surging use cases in several industries, this figure is expected to grow twenty-fold to reach nearly $2 trillion by 2030.
Last year, Palantir showed its commitment to AI advancements by starting the deployment of its Artificial Intelligence Platform (AIP), complementing the company’s existing large language model (LLM) software platform. Remarkably, in months, AIP went from being a prototype to a product worthy of commercial rollout.
In its annual shareholder letter, Palantir’s CEO Alex Karp highlighted the “unrelenting” demand for LLMs from commercial enterprises, which is fueling the momentum of the influx of consumers and, in turn, revenue.
In 2022, the company carried out less than 100 commercial pilots. Since the introduction of AIP in its offering line, Palantir has carried out 130 pilots and a whopping 500 boot camps, underscoring the demand for AI capabilities.
How is Palantir Technologies Performing?
Palantir generated a revenue of $2.23 billion last year, managing to grow its topline by 17% from the prior year. The most significant growth driver in this context is the U.S. commercial business, where the fourth-quarter revenue grew 70% from the prior-year period to $131 million.
The company reached profitability for the first time in its history in the fourth quarter of 2022, and since then, the trajectory has only been upward. In Q4 2023, it reported the highest profit ever in its history of $93 million, increasing by more than 200% year-over-year. This was also the fifth consecutive quarter in which the company reported profitability by GAAP measures.
The company’s margins are also expanding. Its Q4 adjusted gross profit margin stood at 84%, and with aggressive investment in AIP, its adjusted operating margin reached 34%, steadily rising from a modest 17% in the third quarter of 2022.
For the fiscal year 2024, Palantir has lofty expectations for its operations. Its revenue is expected to fall between $2.65 billion and $2.67 billion, with the U.S. commercial segment once again being the flagbearer. The segment’s sales are expected to exceed $640 million or grow by at least a 40% rate.
Should You Sell Palantir Technologies Stock Now?
What more could we want? Hefty expectations, a skyrocketing share price, and robust financial growth—what more could we want? However, there is an issue with the stock. Firstly, we see a stretched valuation.
With such a sharp rise in its share price, the stock’s non-GAAP trailing-12-month price-to-earnings ratio stands at 96x. It is also trading at 23.2 times its trailing-12-month sales. Analysts don’t seem to think this valuation is sustainable, forecasting a near-term price target of $18.63, indicating a potential downside of more than 22%.
To answer the question of how far the stock can go, the near-term downside could be its expensive valuation. Although it remains to be seen whether bullish projections about AI actually come through after testing for a length of time, PLTR exhibits solid prospects to be a frontrunner in the software industry and deliver sound returns on the basis of its strong fundamentals.
