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Palantir Is Quietly Emerging as a Leader in Artificial Intelligence (AI)

Motley Fool - Fri Nov 3, 2023

One of the most watched companies on Wall Street is Palantir(NYSE: PLTR). The data analytics company was founded 20 years ago by Silicon Valley entrepreneur Peter Thiel. For many years, institutional and retail investors alike did not know much about Palantir beyond its close ties to the U.S. government. However, since going public in 2020, the company has increasingly seen its name in the spotlight.

For some, Palantir is viewed as no more than a glorified government contractor specializing in consulting. But for others, Palantir represents a far greater opportunity. The company has developed four core software platforms, all of which leverage artificial intelligence (AI) and machine learning capabilities. And while Palantir does work closely with the U.S. military, it has witnessed increasing demand from the private sector as well -- thanks in large part to its latest AI installment called Artificial Intelligence Platform (AIP).

A recent industry report by Dresner Advisory Services ranked Palantir as the top vendor in AI, data science, and machine learning. The best part? Palantir has ranked ahead of Microsoft and Alphabet. Let's dig into why investors shouldn't sleep on Palantir stock and assess if now is a compelling buying opportunity.

And with the first overall pick...

Dresner Advisory Services recently published an in-depth report analyzing a multitude of vendors operating in AI and its various applications. According to the report, "in rating the vendors, we consider core features (including neural network support), data preparation, usability, scalability, integration, and support for big data/open-source technologies."

Effectively, this is Dresner's summary of vendors that operate across all the different AI features the report analyzes. The post below from Palantir's corporate account on X (formerly Twitter) highlights the company's top ranking:

Per the report, Palantir tied for a first-place spot with Dataiku, DataRobot, and Domino Data Lab. Ever heard of any of these companies? All three are privately held companies backed by venture capital firms. Of note, Palantir ranked higher than Alphabet, Microsoft, C3.ai, SAP, Oracle, Tableau (acquired by Salesforce.com), and highly tracked unicorn Databricks. That is quite a roster.

While it's nice to see Palantir atop a list of tech behemoths, investors may be curious what the company is doing in order to take the AI world by storm.

A person using a chatbot

Image source: Getty Images.

Things to keep an eye on

During Palantir's second-quarter earnings call, investors learned that the company increased its customer count 38% year over year for the trailing-12-month period ending June 30 -- adding over 100 new clients. While that level of growth is impressive, Palantir's top line only managed to grow 13% year over year.

In my opinion, Palantir is laser-focused on customer acquisition right now and fully monetizing these clients is a years-long journey. One of the most critical ways Palantir is trying to separate itself from the likes of Big Tech is offering boot camps for its products. These seminars are meant to serve as a source of lead generation for Palantir during which prospective customers can demo the company's various software platforms.

Another potential catalyst for Palantir is its foray into virtual and augmented reality. The company just released another software development dubbed Palantir Mixed Reality that is aimed to be used in VR headsets to assist with simulated military operations.

In my assessment, everything Palantir does is calculated. There is a reason not much was known about the company for a long time and now, Palantir is blitzing the media landscape with conferences, interviews, and public demos of its innovative (and connected) product offerings. I think that over the next couple of years, investors will witness exponential growth in Palantir's customer base, which should lead to more meaningful top-line acceleration and profit expansion as customers increasingly rely on Palantir's full-spectrum AI ecosystem.

PLTR PS Ratio Chart

PLTR PS Ratio data by YCharts

Should you invest in Palantir stock?

There are a multitude of options to choose from when it comes to valuing a stock. While Palantir is already profitable on a generally accepted accounting principles (GAAP) basis, many of its peers are not. Moreover, Palantir and its cohorts have little operating history of generating consistent positive free cash flow. For this reason, I've chosen to benchmark Palantir against a set of comparable growth stocks using the price-to-sales (P/S) ratio.

Investors can see that Palantir stock fits squarely in the middle of this peer set. While the stock trades at a slight premium compared to ServiceNow and Datadog, Palantir trades at a significant discount compared to data-analytics software enterprise Snowflake.

Given the market sentiment around Palantir expressed in the Dresner report, I would encourage investors to zoom out and take a holistic view of AI investment opportunities. As I alluded to above, the only companies that ranked as high as Palantir are all privately held by venture capital and private equity firms. This means that retail investors cannot invest in these businesses on public exchanges.

When it comes to leaders in AI, I am of the belief that a first-mover advantage is critical. While Big Tech enterprises such as Alphabet, Microsoft, and Amazon all have deep pockets and have already demonstrated a willingness to invest aggressively, Palantir's moves should not be overlooked. Generative AI and its various applications have been a core part of Palantir's DNA since the company was founded two decades ago.

Now, as interest in AI begins to ratchet up and IT budgets allocate more capital toward large language models and other AI-powered tools, Palantir looks well-positioned to dominate. The company spent 20 years quietly building out its software platforms and over the last several months it has rather quickly stitched together the threads of its broader AI fabric.

Long-term investors should consider the potential of Palantir boot camps, the company's progress to date, and how far ahead the technology is viewed when benchmarked against its peers. Furthermore, as the stock hovers at a valuation multiple right in the middle of its peers, it's hard to pass up this bargain. Now looks like an incredible opportunity to dollar-cost average into a position for existing and new investors.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Alphabet, Amazon, Microsoft, and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, Microsoft, Oracle, Palantir Technologies, Salesforce, ServiceNow, and Snowflake. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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