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Once again this year, artificial intelligence (AI) remains the driving force behind the tech sector's gains, just as it was in 2023. While the wildly popular “Magnificent Seven” group of mega-cap stocks continues to be a favorite among Wall Street analysts and investors, many smaller players are also emerging to capitalize on this exciting niche.
Valued at $55 billion by market cap, Palantir Technologies (PLTR) is popular for its data integration and analytics platforms, particularly Gotham and Foundry. Gotham focuses on government and intelligence use cases, whereas Foundry serves commercial clients.
The company’s AI-driven capabilities drove its stock price up by 167% last year, compared to the S&P 500 Index’s ($SPX) gain of 25%. Palantir's recent robust fourth-quarter results also piqued the market's interest, pushing its shares up by another 42% year to date.
While the overall Wall Street sentiment for PLTR stock is relatively bearish, owing in part to its lofty valuation, some experts believe it is an undervalued AI stock with excellent long-term prospects.
Palantir’s AIP Platform Drives Exceptional Growth
Palantir's AIP, or Artificial Intelligence Platform, has driven the company's recent financial and stock price gains. The platform aids in the analysis of large amounts of data for various industries to uncover patterns and insights that are required for decision-making. In the annual shareholder letter, CEO Alex Karp stated that "momentum with AIP is now significantly contributing to new revenue and new customers" for the company.
In the fourth quarter, total revenue jumped 20% year-over-year to $608 million, while full-year revenue increased 17% to $2.23 billion compared to 2022. It also reported a GAAP (generally accepted accounting principles) profit of $93 million, its fifth consecutive profitable quarter. Notably, Palantir is eligible for inclusion in the S&P 500 Index, after having met the requirement of being profitable for four consecutive quarters.
Palantir's extensive involvement with government agencies has been a significant driver of its growth. Government contracts account for 54% of its total revenue, providing a consistent revenue stream. It also contributes to Palantir's reputation for providing powerful and secure data solutions. However, some risks include controversial government projects or reduced defense budgets.
Currently, Palantir has an ongoing, three-year contract worth $250 million with the U.S. Department of Defense to provide AI data analytics services. The company has other collaborative deals with foreign government agencies. In Q4, the company generated $324 million in Government revenue, an 11% increase year-over-year. For the full year, revenue from this source increased 14% to $1.2 billion.
While government contracts remain a key component of Palantir's business, the company has actively expanded its portfolio to include commercial clients from a variety of industries. The Commercial segment generated $284 million in revenue, a 32% increase year on year. The U.S. commercial market, in particular, increased by 70% year-over-year to $131 million.
The Commercial segment is rapidly growing, accounting for 46% of total revenue. Last year, the company formed strategic collaborations with CAZ Investments and PwC, which could further boost the segment this year.
Management expects U.S. commercial revenue to grow by 40% in 2024 to top $640 million, resulting in total revenue of $2.65 billion to $2.69 billion for the full year. This would represent year-over-year growth of 18% to 20%. Meanwhile, analysts expect revenue of $2.67 billion and earnings growth of 30.5% to $0.33 per share.
Despite its rapid growth, the company maintains a strong balance sheet, which is impressive. Palantir had a $3.7 billion cash balance (cash, cash equivalents, and U.S. treasuries) at the end of 2023. It also generated $731 million in adjusted free cash flow (FCF) in 2023, and expects to generate $800 million to $1 billion in 2024.
Analysts predict that Palantir's revenue and earnings will increase by 20.5% and 20.4%, respectively, in 2025. Most analysts consider the stock to be quite expensive, trading at 64 times forward earnings and 17 times forward sales.
Wall Street Opinions Are Mixed on PLTR
Recently, HSBC analyst Stephen Bersey changed his stance on PLTR to “neutral” due to its high valuation. The analyst is, however, impressed by the company's AI strategies and growth prospects. Bersey has a price target of $22 for PLTR.
Meanwhile, Citi analyst Tyler Radke upgraded PLTR to "hold" from "sell" following the company's strong quarterly results, which displayed continued profitability strength. The analyst also increased the stock's target price to $20, as Tyler stated, “U.S. Commercial strength is getting harder to ignore.”
Likewise, Brent Thill of Jefferies also upgraded the stock to “hold” from "sell,” impressed with the company’s AIP platform. BofA Securities analyst Mariana Perez Mora shared the same optimism, reiterating her “buy” rating and raising the target price to $24 from $21.
While Palantir stock is soaring again, the overall stance among analysts remains skeptical, with a consensus “hold” rating. Out of the 13 analysts covering the stock, two rate it a “strong buy,” one rates it a “moderate buy,” five rate it a “hold", one suggests a “moderate sell,” and four analysts recommend a “strong sell.”
Palantir has surpassed its average target price of $17.54. Its high target price of $30 implies an upside potential of 22.7% over the next 12 months.
Here's Why PLTR Is the Best Underrated AI Stock To Pick Now
The AIP platform is still in the nascent stage and has yet to uncover its full potential, which could boost revenue and earnings in the coming years. Alex Karp emphasized, “AIP is the future of our company, and we believe that it will become the dominant platform for the entire industry.”
As Palantir continues to expand its reach across government and commercial sectors, diversify its AI offerings, and explore global markets, the future looks promising. It might be worth paying the premium.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
