Jason's World

The expectations of slowing interest rate hikes as well as the better than expected inflation report today has breathed new life into the AI hype that was tamed by market unease over Canada’s interest rate hike last week and the indication last Friday that the S&P has officially entered a bull market.

Many of the stocks that have benefited from the hype are well known: traditional big tech companies like Microsoft and Apple, and more newly minted mega-caps like Nvidia have soared significantly over the past few months. Nvidia, in particular, became the sixth trillion-dollar company in the world as its blockbuster earnings report positioned the company at the forefront of the AI mania.

The gains of these well-known names have created coattails that have lifted lesser-known companies that are likewise companies that deal with AI. For example, C3.AI has doubled since May despite showing no profitability and a lowering of its revenue guidance during its last earnings call.

Enter Palantir Technologies (NASDAQ: PLTR). While it has attracted some controversy in the past, I believe it is one of the diamonds in the rough for investors looking to hop on the AI bandwagon. Its recent acheivement of profitability and increased attention from commercial players amidst the general hype around AI as well as its recent AIPCon make a compelling case that the stock has a lot much more to grow.

Earlier this month, Palantir headlined its first AIPCon to demonstrate its flagship product, the AIP (Artificial Intelligence Platform). This platform allows organizations to monitor situations in real time and allows businesses to quickly deal with large amounts of data. 

Palantir was viewed by Wall Street as a niche company that primarily does business with the government, as it previously faced challenges trying to expand its commercial business. However, Palantir has recently demonstrated that it can attract partners in the commercial sector as well. Last Wednesday, Panasonic has announced that it will use Palantir’s software to improve its processes at two of its factories, one being the Gigafactory in Nevada which is a joint venture with Tesla. And as CEO Alex Karp said in an interview a few days ago, Palantir has been receiving more inquiries in recent months than it did in previous years. This surge in interest in Palantir’s products is backed up by data showing that its customer base has grown by 41% year-over-year.

(Source: PLTR Q1 2023 Earnings Call)

There are also many other long-term positive signs for the company that can be seen in the Q1 2023 data. For example, Palantir’s SG&A expenses as a percentage of its revenue is on a solid downward trend. In this recent quarter, Palantir has worked towards trimming its SG&A expenses while maintaining sufficient expenses on R&D, as a percentage of revenue.

(Source: Seeking Alpha)

With cash and Treasury security holdings of around $3 billion and no debt, Palantir is well-positioned to weather any storm. The potential downside in the near-term may also be negated by the fact that investors are increasingly confident of a soft landing if there is any landing at all.

One possible reason for this renewed customer interest is that Palantir has rolled out an LLM, which is a ChatGPT-like chatbot, on its platforms. This makes the entire software dramatically easy to use as end-users can basically type in text-based instructions and get a swift response in return. Which means that, as Jensen Huang put it: “Everyone is a programmer. Now, you just have to say (in AIP’s case, type) something to the computer.”

This means that AIP, along with other generative AI platforms, have the potential to gain traction not only with big players but also with a substantial swath of the general public as smaller businesses will be able to adopt these platforms with relatively low cost given their ability to be easily operated.

Other analysts also believe that Palantir has the experience of navigating complicated regulatory environments that other companies wishing to enter into AI do not currently have, which gives Palantir a substantial leg up within the industry. In Bank of America’s bull case for Palantir, in which it’s target price for Palantir changed from $13 ($3 overvalued) to $18 ($2 undervalued), analysts for Bank of America have noted: “From its experience working with the government and highly regulated industries, [Palantir] has already developed and implemented the architectural design that supports generative AI in a compliant and private world.”

Of course, after a more than two-fold appreciation in the value of Palantir over the past month, there may be concerns over whether Palantir is in a bubble. But as interest in AI continues to rise and Palantir specifically has been given second looks from Wall Street analysts due to its newfound potential, I believe the momentum fueling Palantir’s rise is unlikely to run out anytime soon. While there may be price corrections from time to time, these corrections present an opportunity to accumulate more shares rather than a warning that the company is losing steam.