This artificial intelligence (AI) pioneer has been invited to join the prestigious S&P 500 index after years of impressive growth.
of S&P500 (^GSPC -1.32%) This index is considered by many to be the best comprehensive measure of the U.S. stock market because it includes the 500 largest publicly traded companies in the United States. Given the breadth of businesses that make up the index, it is considered the most reliable benchmark of overall stock market performance. To be considered for inclusion in the S&P 500, a company must meet the following criteria:
- Be a US-based company
- has a market capitalization of at least $18 billion
- High liquidity
- At least 50% of outstanding shares must be tradable
- Must be profitable under generally accepted accounting principles (GAAP) in the most recent quarter
- Must have been profitable for the previous four quarters combined
Palantir Technologies (PLTR 11.14%) is one of the latest additions to the S&P 500 index, joining the benchmark on September 23rd. This makes the company one of only 11 companies to join the S&P 500 index so far this year. Since the dawn of generative AI early last year, Palantir stock has soared 845%. This is because its expertise in the field has driven solid revenue and profit growth.
Some investors are concerned about Palantir's high valuation, given the stock's parabolic rise. But one Wall Street analyst thinks this is just the beginning. Let's take a look at what's fueled Palantir's epic rise and whether there's even more runway for future growth.
Image source: Getty Images.
AI is not just for big tech
Palantir has been developing cutting-edge AI solutions for over 20 years. The company built its history on devising sophisticated algorithms to serve the U.S. intelligence, military, and law enforcement communities. The system has developed an incredible ability to connect seemingly unrelated data to thwart terrorist plots and bring criminals to justice.
The company has expanded beyond its small roots and brought the same data mining know-how to the enterprise. Palantir's AI and analytics systems comb through data and provide businesses with solutions to real-world problems.
Last year, when businesses started looking for AI they could use, Palantir was one of the first to develop its Artificial Intelligence Platform (AIP), a generative AI system that provides data-driven answers. The system leverages company-specific data to develop tailored solutions.
the numbers speak for themselves
One of the main obstacles to AI adoption is that most companies lack the expertise to get started. Palantir has developed a go-to-market strategy that takes this issue off the table. The company set up boot camp sessions that paired customer representatives with Palantir engineers to ensure they were able to develop the AI solutions they needed. This strategy has been more successful than the company could have imagined.
The evidence is clear in Palantir's quarterly reports, filled with customer testimonials detailing AIP success stories. In the third quarter, Palantir closed 104 deals worth at least $1 million. Thirty-six of the properties were worth more than $5 million, and 16 were worth at least $10 million. The company says many of these deals were signed within just a few weeks of customers attending bootcamp sessions.
Palantir's overall results paint a convincing picture. Revenue was $726 million, up 30% year over year and up 7% sequentially. This marks the company's eight consecutive quarters of profitability, which contributed to its inclusion in the S&P 500.
Perhaps more evidence is that Palantir's U.S. commercial revenue, including AIP, grew 54% year-over-year and customer count grew 77%. This led to a 73% rise in the sector's residual transaction value (RDV). If RDV is growing faster than its revenue, it can provide insight into the future prospects of a rapidly improving company. It also shows that Palantir is rapidly moving away from its dependence on government contracts.
Although there is no consensus on the overall addressable market for generative AI, the magnitude of the estimates may be instructive. At Ark Invests big idea 2024Cathie Wood concludes that the AI software market could soar to $13 trillion by 2030. The bull case is even more impressive: $37 trillion. Given Palantir's expertise in this area and success in helping customers implement AI solutions, it's clear that the company has a long way to go.
bullish view
There's no denying Palantir's high valuation, which has divided Wall Street. Of the 19 analysts who covered the stock in October, six rate it as a buy or strong buy, seven rate it as a hold, and the remaining six rate the stock as underperform or sell. Evaluated. A near common thread among bears is concern about its valuation, but appearances can be deceiving.
The stock is currently selling at a forward P/E ratio of 160 times and next year's sales of 40 times. However, Palantir's forward price-to-earnings ratio (PEG), which takes into account its accelerating growth rate, is 0.5, and a value less than 1 is considered an undervalued stock.
I'm not alone in believing this stock is still a buy. Green Tech Research analyst Hilary Kramer said Palantir could “easily become a $100 stock” following its inclusion in the S&P 500, which is a 65% increase for investors compared to Wednesday's closing price. This means that profits can be expected.
The analyst cited Palantir's strong and accelerating sales and profit growth, as well as its growing backlog, as catalysts for rerating the stock.
For investors who remain convinced that Palantir is too expensive, dollar-cost averaging provides a mechanism to build a position over the long term and add more shares when the multiple becomes more attractive.
To be clear, Palantir Technologies does not fit into every portfolio. But for those with the right investment horizon and cast-iron constitution, Palantir taps into vast opportunities within the AI ecosystem and could be highly profitable for investors.
