AI stocks have been in free fall across the past week. The primary culprit is the broader market. The S&P 500 has been down six days in a row while the Nasdaq is down nearly 7% since April 11th. It’s not far from taking just two weeks to enter correction territory.
The broader market’s decline can be traced to interest rates. Stocks rallied over the past six months as it appeared the Federal Reserve would move to rate cuts. With those cuts now in doubt, investors are shifting back to Treasuries which have seen their yields spiking.
While watching a portfolio of stocks fall is never fun, if you’ve been sitting on the sidelines watching AI stocks race to new highs, this recent sell-off could present an opportunity. Today I want to focus on Palantir (NYSE: PLTR), a stock about 17% off recent highs. I’ll explain why any further sell-off could be a big opportunity for investors looking for a stock with significant upside potential.
Why Palantir Struggled After Its IPO
Palantir was one of Silicon Valley’s original Unicorns. The company hit a peak valuation of $20.4 billion in a 2015 funding round before finally going public in 2020 at a similar valuation.
The promise of Palantir’s technology was never in question. The company built business intelligence software that found connections between all types of “unstructured” data like videos, audio, and standard spreadsheets. The Department of Defense quickly became their top customer and used Palantir to sift through massive volumes of data like audio and video recordings.
However, Palantir’s stock collapsed shortly after its IPO. By the end of 2022, its shares traded for just $6.42 after breaching $35 per share in early 2021.
A key reason was a lack of success selling to commercial customers. In the quarters following Palantir’s IPO, its growth rate continued plummeting. While Palantir had lucrative inroads with government customers, that market lacks the upside commercial sales offer.
| Quarter | Sales Growth from Prior Year | Market Capitalization (After Reporting Prior Quarter) |
| Q4 2020 (After IPO) | 40.4% | $43.55 Billion |
| Q1 2021 | 48.8% | $35.45 Billion |
| Q2 2021 | 49.1% | $48.61 Billion |
| Q3 2021 | 35.5% | $48.62 Billion |
| Q4 2021 | 34.4% | $24.02 Billion |
| Q1 2022 | 30.8% | $15.27 Billion |
| Q2 2022 | 25.9% | $20.27 Billion |
| Q3 2022 | 21.9% | $14.60 Billion |
| Q4 2022 | 17.5% | $17.80 Billion |
| Q1 2023 | 17.7% | $20.23 Billion |
| Q2 2023 | 12.7% | $36.67 Billion |
| Q3 2023 | 16.8% | $41.04 Billion |
| Q4 2023 | 19.6% |
$50.92 Billion |
As you can see, the company’s shares sank as its sales growth slowed into 2022. However, even with lower growth rates today, shares have rebounded. That’s because Palantir is finally discovering a path that could yield massive growth in the commercial space.
The Background on Palantir’s Software
Palantir has no shortage of business intelligence competitors ranging from SAP to Snowflake (NYSE: SNOW). It’s a crowded space where customers want to know what kind of return on investment they can get for the time and expense of deploying new software suites.
That’s important because even great software needs to have a clear sales pitch as to why it’s better for customers compared to the litany of other options. While Palantir was able to effectively demonstrate to the Department of Defense what its unique selling proposition was, it hasn’t been able to win over a critical mass of large commercial customers.
However, the nature of how Palantir’s software is built might put it at the center of the trend set to define the next 15 to 20 years: artificial intelligence.
Most data in companies is siloed into different formats and often stored away in different software systems. Palantir was created to integrate all this data into a single operating system. The fact Palantir calls this ‘The Ontology-Powered Operating System’ shows you what a hard sales pitch it could be getting into enterprises!
The first layer of Palantir’s operating system is called the “Semantic Layer.” It takes different types of data and creates a framework where relationships between them can be analyzed. From there, its software creates real-time monitoring, mines for inefficiencies, and applies artificial intelligence to simulate changes in business processes.
However, it’s this “Semantic Layer” of building a framework across all data that could make Palantir such an outstanding AI play. Palantir’s ability to take disparate data from across an entire organization and put it into a framework is exactly what’s needed to begin training an LLM (large language model) off a company’s data.
Palantir realized this and designed its Artificial Intelligence Platform (AIP). AIP is a way for large companies to take data from across their organization and train an LLM. With almost every major company now wanting an AI strategy, Palantir suddenly has a sales pitch that companies are looking for.
Palantir’s Could Become a Leading AI Platform
In the video above I spend more time analyzing Palantir, but the key point is they have an opportunity to become the dominant platform for companies to build LLMs off their own data.
As you can imagine, that’s a huge potential market. In addition, it’s a market many investors have been looking to find a way to profit from: AI software.
Most companies with large foundational models (OpenAI, Anthropic) are currently private and are also a long way from profitability. Magnificent 7 stocks like Meta (Nasdaq: META) also are investing heavily in AI models, but those companies are so large the upside from AI may not be as great.
In the case of Palantir, it’s currently trading for about a $46.7 billion market cap. That doesn’t mean it’s cheap (I’ll get into that more in a moment). However, it is small enough that if Palantir captures a massive market, investors could be looking at significant upside. You could imagine a future where a company with the go-to platform for companies creating their own AI models is worth a number ending with a ‘trillion’ rather than ‘billion.’
What’s the Downside?
This isn’t to say Palantir is a “sure thing.” The company trades for 21X its sales and 235X its trailing earnings. Palantir has just over a billion in trailing commercial sales. For the company to get to a place that justifies its current valuation, that commercial sales total will need to eventually be several multiples larger.
The good news is that Palantir may be at an inflection point. Last quarter U.S. Commercial sales grew 70% year-over-year and 12% quarter-over-quarter. While global commercial sales are growing at a slower pace, there’s no question that U.S. companies are at the leading edge of AI adoption. More importantly, Palantir is getting more customers to give them a shot. U.S. commercial customer count grew 22% quarter-over-quarter.
As Palantir has always struggled simply convincing customers to try deploying their software, they should be able to expand revenue significantly with these new customer engagements.
Palantir Could “Go On Sale” If the Stock Market Drop Continues
Buying Palantir isn’t without its risks, but I hope I’ve demonstrated why they have a unique AI offering that could see substantial growth. If you’re interested in Palantir, I’d recommend watching their stock closely in recent weeks.
When the market shifts to fear, the stocks that saw the highest returns during its rally tend to fall the fastest. That’s true of AI stocks right now. Palantir saw a large surge following its very good fourth-quarter earnings. If the market continues selling off, there’s a chance you could pick up Palantir for prices last seen before that earnings announcement (around $17 per share).
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