Palantir Technologies (NASDAQ:PLTR) has been one of the best-performing artificial intelligence stocks over the past year, even better than Nvidia (NASDAQ:NVDA).
Where the chipmaker returned 171% for investors in 2024, the AI data analytics firm generated returns of 340%, or twice Nvidia’s performance. It got a big boost after the November presidential elections, too, due to several people in the new administration having ties to the AI shop, including founder Peter Thiel and David Sachs, an early investor in Palantir.
Palantir Technologies has been a top-flight AI stock, rising twice as fast as headline-grabbing Nvidia over the past year. Wall Street has a collective hold rating on the stock and a price target suggesting it could be cut nearly in half over the coming year. Both its government and commercial business operations are growing smartly and the Trump administration may open more opportunities for growth. If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
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President Trump is also supportive of AI initiatives, as the $500 billion Stargate joint venture he announced the other day underscores.
Palantir, though, is scheduled to report fourth-quarter earnings after the market closes on Feb. 3. Analysts are looking for revenue to jump 29% to $2.87 billion and for profits to surge over 330% to $0.39 per share. Yet despite the upbeat outlook, Wall Street has a consensus hold rating on the stock. Worse, their one-year price target implies the stock could drop 47% to of $41 per share.
Should investors buy Palantir Technologies ahead of earnings, or should they heed Wall Street’s warning that PLTR stock is headed for a fall? Let’s find out below.
A dual-pronged approach to AI
As most investors understand, Palantir targets two distinct markets: its legacy government operations and the newer, growth-oriented commercial market. While the former is its largest segment, generating $320 million in Q3 compared to $179 million in the latter, the commercial segment is growing faster, 54% to 40%, year-over-year. Overall, revenue was up 30% while adjusted EPS jumped 43%.
Although government growth is still strong, and could get stronger with favorable AI policies over the next few years, it remains a limited opportunity. Revenue from its government AI technology is primarily derived from U.S. federal contracts.
While it has worked with the Ukrainian military to track troop movements in its war with Russia and it has been working with the Israeli Ministry of Defense in strategic partnerships aimed at supporting its own war efforts, most government agencies around the world won’t be able to access Palantir’s AI technology. It is a self-limiting governor on the segment’s growth potential.
Significant tailwinds to push PLTR higher
Palantir’s contribution margin from its government operations are slightly more profitable than that from its commercial segment, though that is likely to flip sooner rather than later.
Further, government contracts can be variable and lumpy, though with most contracts lasting four to five years, it does give Palantir some clarity and predictability to its cash flows. Even so, the more assured growth opportunity is on the commercial business side.
Palantir’s customer count grew 38% last quarter and was 6% higher sequentially, with the number of deals worth over $1 million rising to 104. CEO Alex Karp told investors the rate of adoption of AI technology separates U.S. business from their European counterparts and will drive American ascendancy in the field.
Diminishing headwinds open the door
The AI data analytics firm is also only recently profitable, though now that it does operate in the black, it continues to grow. That’s likely going to continue. However, those profits aren’t necessarily coming from operations.
At the end of the third quarter, Palantir had $4.56 billion in cash, equivalents, and short-term investments, up 24% from the end of last year. Of the $391 million in net profits it generated year-to-date, $142 million, 36% is in the form of interest income. That’s down from 73% last year, but still represents non-operating income. It’s not a problem, per se, and is moving in the right direction, but is worth watching.
Key takeaway
The biggest argument against Palantir Technologies stock tumbling 47% or more is that the consensus price target is weighed by a seemingly low ball outlier. Royal Bank of Canada set a $9 per share price target on the stock last August that hasn’t been adjusted since. More recent predictions over the last two months put it around $68 a share. That implies a less than 12% pullback in the stock.
Palantir possesses a lot of tailwinds that should drive its business and profits higher. While we may see a course correction at some point, it doesn’t look to be as dramatic as Wall Street’s headline number suggests. PLTR stock still looks like a long-term winner.
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