Data mining actions and artificial intelligence AI Specialist Palantir Technologies (NYSE: PLTR) have grown an impressive 47% so far in 2024.
Palantir beat consensus revenue estimates and met adjusted earnings per share estimates for the first quarter of 2024. Despite the stellar numbers, the stock fell nearly 15% after the quarterly results, as investors were disappointed by the company’s conservative revenue guidance for the full year of 2024.
Palantir stock has since regained all of its losses, largely due to some recent profit-taking in semiconductor/AI stocks and a market rotation from semiconductor stocks to software stocks. However, this software-as-a-service (SaaS) player, known for its exceptional ability to mine mountains of government and enterprise data for actionable insights, still has a lot to offer.
Here are three reasons why investors should take a stake in Palantir now.
1. Unleash the power of AI
Since its launch, Palantir’s Artificial Intelligence Platform (AIP), based on a large language model, has seen widespread customer adoption. Leveraging data analytics and machine learning, AIP helps companies go “beyond chat” and efficiently deploy AI solutions to drive real business value.
Palantir’s AIP applies data integration and ontology technologies to enable customers to deploy AI solutions, even with messy underlying data. AIP converts unstructured data, including emails, Slack messages, PDFs, comments, audio files, and images, into structured actions and outputs. This contrasts with competitors who claim that only 10% of a customer’s data is AI-ready.
Palantir’s go-to-market strategy, based on boot camps, is also proving successful. More than 900 organizations had participated in the boot camps by the end of the first quarter. The company also rolled out Build with AIP (tutorials and reference implementations) to enable customers to effectively use AIP to build AI solutions. Subsequently, AIP helps Palantir acquire new customers as well as expand its existing customer base.
Strong US business activity and reacceleration of government activities
The U.S. commercial business was arguably Palantir’s strongest performer in the first quarter, with revenue growth of 68% year-over-year, excluding strategic investments. This trend is expected to continue in 2024, driven primarily by growing adoption of the company’s AIP platform. Palantir noted a robust U.S. commercial customer count of 69% year-over-year in the first quarter. Unsurprisingly, the company increased its fiscal 2024 growth outlook for this customer cohort to 45% from the previous estimate of 40%.
Palantir’s U.S. government business also showed strength, with revenue up 8% year over year in the first quarter, an acceleration from 3% year over year growth in the prior quarter. The company secured more than $178 million from The American army for a project under the Tactical Intelligence Targeting Access Node (or TITAN) program, enabling it to help the military detect enemy targets.
With this project, Palantir became the first software company to be awarded a prime contract (a direct contract with the government agency) for a hardware production project. By positioning itself as a “prime software vendor,” Palantir could benefit from even more opportunities in the U.S. defense sector.
Government business involves stringent vendor vetting and is inherently perennial. Therefore, while this business is growing more slowly than commercial business, it provides a stable revenue base for Palantir. Additionally, in the current era of geopolitical tensions, Palantir’s government software solutions have become even more relevant and could see significant growth in the coming years.
Impressive financial results
Investors’ reaction to Palantir’s fiscal 2024 revenue guidance seems short-sighted, as the company’s revenue growth will likely be uneven at the start of the ongoing AI transformation. The company’s financial performance will become increasingly predictable as AI technologies advance and are adopted around the world.
Still, Palantir’s profitability is improving at a steady pace. The company reported generally accepted accounting principles (GAAP) net income of $106 million in the first quarter, marking its sixth consecutive quarter of GAAP profitability. The company also reported GAAP operating income of $81 million and an adjusted operating margin of 36%. Palantir’s Rule of 40 score (a measure of the company’s revenue and earnings performance) also improved from 54 in the fourth quarter of 2023 to 57 in the first quarter of 2024.
Palantir is also generating cash at a healthy pace. The company reported $130 million in cash from operations and $149 million in adjusted free cash flow in the first quarter. It ended the first quarter with $3.9 billion in cash, a resource that gives it enough financial flexibility to invest in growth initiatives.
At a trading value of 24 times trailing 12-month revenue, Palantir stock isn’t cheap. However, the premium valuation seems justified given the critical nature of its software in multiple government operations and the rapid expansion of its commercial business. So it makes sense to invest in this high-flying stock now.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
3 Reasons to Buy Palantir Like There’s No Tomorrow was originally published by The Motley Fool
