Since early August, Palantir Technologies (NYSE:PLTR) pleasantly surprised shareholders with a 26% valuation boost, from $26.95 to the current $34.04 per share. However, this was less surprising for investors who looked into how exactly Palantir implemented AI to bolster its bottom line.
Most recently, on September 6th, S&P Dow Jones Indices announced that Palantir and Dell Technologies (NYSE:DELL) will join the S&P 500 index on September 23rd. While Palantir replaced American Airlines (NASDAQ:AAL), Dell replaced Etsy Inc. (NASDAQ:ETSY).
This was also not surprising given the tight collaboration between Dell’s AI Factory and Nvidia (NASDAQ:NVDA). Year-to-date, PLTR stock is up 105%, while Dell shares returned 42% value. Both companies significantly outperformed Bitcoin, which largely had sideways action and 23% returns.
Although S&P 500 status is not new for Dell, having been on it between 1996 and 2013, it is a return for the PC vendor since it went public again in 2018. In contrast, Palantir is a much younger company, having been founded by Peter Thiel in 2003 but going public on NYSE in 2020.
Since Friday, the S&P 500 news has boosted PLTR stock by 12%. Should investors take this as an opportunity to expose themselves to AI within the intelligence sector?
Why Was Palantir’s Profitability Problematic?
After Palantir Technologies went public on September 30, 2020, it took two more years for the company to start making money, as of Q4 2022. In the quarter, Palantir became profitable, delivering a net income of $31 million and total revenue for FY 2022 of $1.91 billion.
Since then, Palantir has increased profits every consecutive quarter. In the latest Q2 2024 earnings delivered in August, the data analytics company reported a $134 million net income after leaving FY 2023 with a total revenue of $2.23 billion.
In other words, Palantir’s gross margin, as profitability measuring the percentage difference between gross profit of $550 million and revenue of $678 million, increased sharply. From the end of 2020 to Q2 2024, Palantir’s gross margin increased from 67.77% to 81.44%.
Previously, the company’s R&D expenses gobbled up much of the profits. But this critical investment waned drastically, going from $560.6 million at the end of 2020 to $387.5 million by the end of 2021.
During that capital intensive period, Palantir enjoyed a buffer from government contracts. From the U.S. Department of Defense (DoD), U.S. Special Operations Command (USSOCOM) and U.S. Army to Department of Homeland Security (DHS), they comprised over 70% of Palantir’s revenue.
Palantir’s Commercial Focus, but Even Greater Government Boost?
Government contracts not only provided Palantir’s buffer for financing, but they launched its reputation as a robust enterprise, one that is deeply embedded within the so-called “deep state”.
In Q2 2024, the gap between the company’s commercial and government revenue continues to close, at $307 million vs $371 respectively. With that said, Palantir also accumulated a $5.4 billion deficit. Although the accumulated deficit is $239.6 million lower from the year-ago quarter, it is still substantial.
However, it appears that Palantir’s investments in large language models (LLMs) to launch its Artificial Intelligence Platform (AIP) in April 2023 are just beginning to pay off. Currently, Palantir holds a 16.77 price-to-book ratio, with an enterprise value/revenue ratio of 25.89.
At nearly 17 times its book value, investors clearly have high expectations, placing Palantir in the high-risk, high-reward investment box. That very well may be the case if former President Donald Trump wins his 2nd term. It is no secret that Peter Thiel backed both Trump and his VP pick, J.D. Vance.
Although this relationship didn’t sit well with Palantir CEO Alex Karp, having described it as an obstacle to “to get things done”, it appears that this will become a moot point heading into 2025. Fully expecting greater intake from government agencies, Palantir announced AIP’s launch on Microsoft’s Azure cloud infrastructure in August.
Through this partnership, Palantir’s family of AI-powered products – Foundry, Gotham, Apollo, and AIP – will receive Azure Government Secret (DoD Impact Level 6) and Top Secret cloud access.
“Bringing Palantir and Microsoft (NASDAQ:MSFT) capabilities to our national security apparatus is a step change in how we can support the defense and intelligence communities,”
Shyam Sankar, Palantir’s Chief Technology Officer (CTO)
Analyst Forecasts on Palantir Stock
Unsurprisingly, there is much divergence on PLTR valuation. The Royal Bank of Canada (TSX:RY) still maintains its position of $9 price target. This range is near Goldman Sachs (NYSE:GS) price target of $14 to $16, giving PLTR shares a neutral rating as of early August.
Jefferies Financial Group realigned its Palantir price target from $24 to $28, but still gave it a “hold” rating. Wedbush has been rather bullish, with a $38 target, as of this Monday.
At present $34.04, Palantir stock is close to its all-time high of $39 in January 2021, and significantly above its 52-week average of $21.82 per share. On aggregate per Nasdaq data, 15 analysts place the average PLTR price target at $25.42, with the bottom as low as $9 and the ceiling as high as $38 per share.
After PLTR stock becomes an official member of the S&P 500 index, it is likely there will be a large market correction. At this point, investors should consider PLTR stock again, especially if they are confident in President Trump’s 2nd term.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.