Is Palantir Stock a Buy?

Artificial intelligence (AI) stocks have propelled the stock market to a surprisingly strong year in 2023. Even as fears of a recession and the highest interest rates in nearly a generation have dogged investors, the S&P 500 and Nasdaq Composite have soared this year in large part due to the emergence of generative artificial intelligence.

Among the winners from the AI boom is Palantir Technologies (PLTR -1.02%), which is up 169% year to date. Palantir is a software company that specializes in data fusion, or data analysis. These technologies help organizations like governments and businesses parse large amounts of data to make connections they wouldn’t otherwise be able to make. Palantir got its start in counterterrorism and has expanded throughout the government and into the private sector from there. Though its government segment still makes up the majority of its revenue, the commercial business is growing faster, showing that diversifying efforts are paying off.

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Where Palantir stands today

Excitement over the potential for AI has helped drive Palantir stock higher this year, but that’s not the only reason the software stock has nearly tripled. Palantir is committed to delivering a profit, and it has done so by controlling its costs and continuing to grow the top line.

In the third quarter, overall revenue rose 17% to $558 million with a 34% increase in customer count, showing increasing adoption for its technology, and U.S. customer count rose 37% to 181. Palantir tends to serve complex organizations and its contracts are in the multimillion-dollar range.

What was more impressive was the company’s improvements on the bottom line. Operating expenses were down and its cost of revenue was flat in the quarter even as revenue was up substantially, showing the business is effectively scaling up.

Palantir also reported its fourth straight quarter of positive net income under generally accepted accounting principles (GAAP), making it eligible to join the S&P 500.

Additionally, the company is stepping up its efforts in artificial intelligence with its new Artificial Intelligence Platform (AIP), which was released earlier this year. The AIP allows its customers to use the power of large language models like ChatGPT to process the datasets that Palantir helps manage. At the time of the launch, Palantir said it was seeing substantial demand for software that can help large organizations leverage the power of new generative technologies.

Management also credited the AIP for driving growth in the third quarter, saying the impact of AIP on customer operations is “nothing short of remarkable,” and the number of users nearly tripled in the last quarter with nearly 300 organizations using the software. The new platform has also accelerated its sales cycle and improved its unit economics.

Is Palantir a buy?

As a business, Palantir seems to be firing on all cylinders at the moment. Revenue growth is solid. Profit margins are rapidly expanding, and its artificial intelligence platform has become a key growth driver for the company. It also raised its guidance for the full year following the third-quarter results.

However, the business performance is only one component of the buy case. The valuation also has to be reasonable. Based on adjusted earnings, the stock is trading at a price-to-earnings ratio of 69, which is expensive, especially for a company that’s only growing revenue by high-teen percentages.

Still, Palantir has a strong competitive position, entrenched and sticky relationships with its customers, a new AI platform, and growing profit margins. In other words, Palantir appears to have a bright future ahead of it.

While the stock is unlikely to repeat its blowout performance in 2023, Palantir still looks like a smart long-term bet, especially if you’re bullish on AI stocks.