Palantir Technologies: A Rising AI Pioneer and Nasdaq-100 Addition

Palantir Technologies, a leader in artificial intelligence (AI), has seen its stock price skyrocket over 1,000% in less than two years. With its innovative solutions and strong demand for AI capabilities, many believe the company has significant growth potential heading into 2025.

The Nasdaq Composite is a prominent stock index in the United States, monitoring more than 3,000 stocks primarily in the technology sector. A subset of this index, the Nasdaq-100, focuses on around 100 of the largest non-financial companies listed on the Nasdaq exchange. To be included in the Nasdaq-100, a company must meet specific criteria:

• The company must be exclusively listed on the Nasdaq exchange.
• The stock must possess high liquidity.
• It should have been listed on an eligible exchange for at least three consecutive calendar months.
• At least 10% of its outstanding shares should be available for trading.
• A bankruptcy filing is not permitted.

Recently, Palantir Technologies was announced as the newest member of the Nasdaq-100, effective prior to the market opening on December 23. This comes after a massive 1,090% surge in its stock price, largely fueled by the rise of generative AI technology that gained traction early last year.

Palantir's Foundational Role in AI

Palantir's origins trace back to the aftermath of the September 11 attacks, born from the belief that advanced AI algorithms could connect disparate data to preempt terrorist threats. Over time, the company has developed a solid following among various sectors, including the U.S. intelligence community and law enforcement agencies, as it offered innovative data analysis solutions.

With the surge of interest in AI, Palantir quickly responded to the market with its Artificial Intelligence Platform (AIP). This tool connects AI with a company's operational data to deliver tailored, real-time solutions to existing challenges, drawing in a wave of new customers.

To address the knowledge gap often seen in companies, Palantir also offers boot camps, enabling clients to work closely with its engineers and develop custom AI solutions. This effort has successfully diminished common barriers for businesses venturing into AI solutions, as demonstrated by Palantir's robust financial results.

Strong Financial Performance

In the third quarter, Palantir reported a revenue of $726 million, reflecting a 30% year-over-year increase and a 7% sequential growth. Its earnings per share (EPS) also demonstrated a remarkable 100% increase to $0.06, marking its eighth consecutive quarter of profitability.

Particularly noteworthy is the company’s U.S. commercial segment, which includes most of its AIP revenue, achieving a 54% growth year-over-year. This growth has driven an impressive 73% increase in remaining deal value, indicating promising future revenue potential. Additionally, the number of customers in this segment surged by 77%.

Palantir’s foundation within the government sector has been equally impressive, with government revenue growing 40% year-over-year.

Another critical metric is the growing number of contracts Palantir has secured. In Q3, the company signed 104 deals worth at least $1 million, which included 36 larger contracts exceeding $5 million and 16 contracts valued at over $10 million. This trend was particularly evident as many agreements followed closely behind customer participation in Palantir's boot camps.

The demand for Palantir’s services appears to be only in its early stages. A report by global management consulting firm McKinsey & Company indicates that the generative AI market could be worth between $2.6 trillion and $4.4 trillion in the coming decade, suggesting significant growth opportunities for Palantir.

Market Sentiment and Valuation Concerns

Despite Palantir's bright prospects, some investors express concerns that the stock has become overvalued. According to analysts, as of December, only four out of twenty analysts rated the stock as a buy, while nine advised holding, and seven recommended selling. Critics of the stock often cite its high valuation metrics.

Currently, Palantir trades at around 380 times earnings and 69 times sales, metrics that many consider excessively high. Yet, for high-growth companies, traditional valuation metrics may not tell the full story. In fact, Palantir's forward price/earnings-to-growth (PEG) ratio is pegged at 0.63, indicating it may be undervalued.

One notable supporter of Palantir is Dan Ives, a technology analyst at Wedbush. He maintains an outperform (buy) rating for the company and has set a price target of $75, even as the stock crossed that threshold recently. Ives expressed strong confidence in Palantir's AIP strategy, predicting "unprecedented demand" for its AI applications over the next 12 to 18 months.

Furthermore, with Palantir's market capitalization currently around $172 billion, Ives suggests it has the potential to become "the next Oracle,” referring to the established tech giant with a market cap of $494 billion. This belief hints at substantial upside for Palantir's stock in the long run.

While the current valuation may deter some investors, strategies such as starting with a small position or using dollar-cost averaging could be beneficial approaches. Engaging in these tactics allows investors to minimize costs over time and mitigate risks associated with stock volatility.

Palantir Technologies may not be suitable for every investor, but for those willing to embrace higher risks for the chance for considerable returns, the company's ongoing growth in the AI sector offers an enticing opportunity for potential profits.

Disclaimer: The author holds positions in Palantir Technologies, and mentions of Oracle serve to illustrate the corporate context.

AI, Growth, Valuation