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Founded in 2003, Palantir Technologies (PLTR) started with the goal of providing data analysis solutions to government agencies, particularly in the areas of national security and defense. Its software platforms, which include Gotham and Foundry, are intended to integrate, analyze, and visualize complex data sets, allowing users to make more informed decisions.
Over the years, Palantir has grown beyond the public sector to include industries such as healthcare, finance, and manufacturing. Its ability to handle massive amounts of data and derive actionable insights with the help of artificial intelligence (AI) has been driving its fundamentals.
Last year, the stock soared 167%, outperforming the S&P 500 ($SPX), which gained around 24%. The company reported another strong quarter, with its stock price up 32% year to date.
Palantir stock accounts for 2.8% of the ARK Innovation ETF (ARKK), which is managed by well-known investor Cathie Wood. Wood is known for making momentum-driven investments in high-growth, disruptive businesses.
While most Wall Street analysts remain skeptical of Palantir stock due to its high valuation, I believe it is an undervalued AI stock with a lot more room to grow. Let's see what the bulls and bears are saying about PLTR stock.
The Bull Case For Palantir
Palantir's AIP, or Artificial Intelligence Platform, has been a key factor in its success. The company has a strong presence in the government sector, with contracts from agencies such as the Department of Defense and the CIA, which provide a consistent revenue stream, accounting for 54% of total revenue. Furthermore, the government's increased emphasis on data-driven decision-making bodes well for Palantir's long-term success in this space.
In its most recent fourth-quarter results, the Government segment generated $324 million in revenue, an 11% increase year over year. It increased by 14% year on year to $1.2 billion. Total revenue increased by 20% to $608 million, with full-year revenue up 17% to $2.23 billion over the previous year. In Q4, the company reported a net profit of $93 million under GAAP (generally accepted accounting principles), marking the fifth consecutive profitable quarter.
Aside from Palantir's ongoing three-year contract with the U.S. Department of Defense, the company has several other agreements with government agencies. Recently, the company bagged another $178.4 million contract with the U.S. Army as part of the Tactical Intelligence Targeting Access Node (TITAN) program
Palantir's government contracts provide stability, but they also expose the company to regulatory and budgetary risks. Changes in government priorities or policies may have an impact on this segment's revenue stream.
Therefore, it must expand its Commercial segment, which currently contributes to 46% of total revenue. The company has collaborated with CAZ Investments and PwC for them to use its AIP platform. Furthermore, the company's recent strategic partnership with Oracle (ORCL) “to provide secure cloud and AI solutions” could be a game-changer for the company.
Management hopes these deals will boost U.S. commercial revenue by 40% in 2024 to cross $640 million. This could contribute to a total revenue of $2.65 billion to $2.69 billion for the year, representing an 18% to 20% increase over the previous year.
Despite the rapid expansion of its AI products, the company remains financially strong. It ended 2023 with $3.7 billion in cash, cash equivalents, and US treasuries, as well as a $731 million adjusted free cash flow (FCF) balance. In 2024, the company expects adjusted FCF to range between $800 million and $1 billion.
Palantir Stock: What’s the Opinion on Wall Street?
Wall Street's view of PLTR stock is mixed. Monness Crespi Hardt analyst Brian White recently downgraded Palantir stock to "sell" from "neutral" with a target price of $20, citing PLTR's "egregiously rich valuation." The analyst believes the stock has experienced a "meteoric rise on the Gen AI rocket, but now it's time to return to reality."
Furthermore, Citi analyst Tyler Radke maintained a “hold” rating on PLTR stock, citing as positives the company’s recent quarterly results and its new Government contract, which he believes will boost Government segment revenue. However, the analyst has a target price of $20, and cautioned on the stock's valuation relative to its peers.
For context, the stock is currently trading at 69 times forward 2024 estimated earnings and 18 times forward 2024 estimated sales. Analysts project Palantir’s revenue and earnings to grow 20.4% and 30.6%, respectively, in 2024. Revenue and earnings are estimated to further increase by 20.4% and 20.3% year-over-year in 2025.
On the bullish side, Bank of America analyst Mariana Perez raised PLTR's target price to $28 from $24 and maintained a "strong buy" rating following the new government contract. The analyst believes, "This win cemented Palantir's position as the AI Prime in the world of defense."
Overall, Wall Street rates PLTR a “hold.” Out of the 14 analysts covering the stock, two rate it a “strong buy,” one recommends a “moderate buy,” five rate it a “hold", one suggests it's a “moderate sell,” and five analysts suggest a “strong sell.”
Palantir has long surpassed its mean target price of $20.69. Its high target price of $35 implies a potential upside of 54.3% over the next 12 months.
The Bottom Line on PLTR Stock
Palantir's innovative AI platforms are widely admired by both government and commercial enterprises. This innovative software platform still has a long way to go as AI advances. However, the data analytics market is highly competitive. Palantir’s long-term success will be determined by its ability to navigate the complexities of the data-driven world and thrive.
While the stock's overvaluation is a concern, Palantir remains a top long-term AI pick, depending on your risk tolerance.
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.
