Here’s why so many investors love these battleground stocks, and why so many others don’t.
Today, businesses generate mountains of data. That data can be of great value, but only if it is properly harnessed, visualized, and used to improve decision making. However, that data often resides in a variety of different software systems, with various fragments siloed across platforms that can’t communicate with each other, complicating any effort to see the full picture. For example, a corporation may have a customer service database, business management software, a marketing platform, and more. Unifying data from all of these platforms into a single system and mining the integrated output for actionable insights is a difficult task. Palantir‘s (Plastic) 0.44%) specialty and why their services are in such high demand.
Palantir’s Artificial Intelligence Platform (AIP) is its latest innovation and is loaded with potential.
Customers flock to Palantir AIP
Let’s imagine that a wholesale supplier is faced with an extreme weather event that affects one of its centers. Management needs to know what the most efficient alternative methods are to keep their customers supplied and what effect their decisions will have on margins. Or perhaps you are responsible for planning a company’s inventory levels and need to know what impact a price increase or decrease will have on demand. Or, you want to automate supplier payment processing by consolidating documents such as purchase orders, invoices, and warehouse receipts. These are all use cases for Palantir’s AIP.
AIP uses broad language models that allow its customers to ask plain language questions and receive actionable answers. Selling such a complex platform is difficult. Examining use cases from other companies is helpful, but it’s still difficult to visualize how a platform like AIP will work in a specific company. That’s why Palantir holds “boot camps” where potential customers create unique use cases for their companies in just a few days. These have proven to be an excellent tool for growing Palantir’s customer base: its number of commercial customers in the United States is growing explosively.
Source: Palantir.
In the first quarter, this translated into a 40% year-over-year increase in U.S. commercial sales to $150 million and 27% growth in global commercial sales to $299 million. Government revenue grew at a slower pace of 16% to $335 million. Penetrating the commercial market will be critical to Palantir’s long-term success.
Total sales in the first quarter increased 21% year-over-year to $634 million, and Palantir increased its profitability. But not everyone is convinced.
The case of the Palantir bear under analysis
Palantir enjoys a huge following among retail investors and has inspired lively debates between its bulls and bears over the past few years. The company is methodically dismissing many of the bears’ arguments. Let me explain two of them.
First, many lamented the company’s persistent lack of profitability. This was a legitimate criticism, as the company racked up annual losses until 2023, when it reached profitability. Palantir has posted net profits for the past six quarters and has dramatically increased its operating profits.
PLTR Net Income Data (Quarterly) by YCharts.
Second, Palantir investors pointed to the company’s extensive use of stock-based compensation to reward employees. The largest share of such distributions typically goes to top executives. However, the result of issuing a large amount of new stock to pay your team is that the number of shares outstanding increases and shareholders’ share of the pie decreases. However, Palantir has been reducing its stock-based compensation as its revenue has increased.
PLTR stock-based compensation (TTM) data by YCharts.
Using stock-based compensation also helps companies preserve their cash. Palantir ended the first quarter with $3.9 billion in cash and investments on its books and no long-term debt.
Is Palantir Stock a Buy?
Another reason why some investors continue to bet on Palantir is its high valuation. Shares are trading at nearly 25 times current sales value, which is a lower price-to-sales ratio than Crowd on strike and one higher than Snowflake – Both, like Palantir, are high-growth software companies with market caps under $100 billion.
PLTR PS Ratio Data by YCharts.
The stock is also trading at a valuation above its historical average. However, Palantir is the most profitable of these three technology companies. Over its last four quarters, Palantir generated nearly $200 million in operating profits, compared to CrowdStrike’s $24 million and Snowflake’s $1.2 billion loss.
Investors can afford to be patient if they decide to buy Palantir stock. The best strategy would be to increase their holdings gradually and regularly over time so that they can take advantage of any price dips that may occur. A dollar-cost averaging strategy can reduce short-term risk when investing in high-priced stocks.
Palantir has established itself as a leader in data management and artificial intelligence. Although its valuation is high, its earnings are growing and it is in a strong financial position to excel in the long term.
Bradley Guichard has positions in CrowdStrike. The Motley Fool has positions in CrowdStrike, Palantir Technologies and Snowflake and recommends them. The Motley Fool has a disclosure policy.
