Why Did Palantir Stock Go Up So Much?

Well-known software and data analytics company Palantir (NYSE:PLTR) has seen its stock soar in recent weeks. For investors who bought at the bottom, this run has generated returns well in excess of 100 percent. 

Palantir stock has gone up an astonishing 149 percent YTD. Much of this gain has been quite recent; the stock is up 103 percent over the past three months and 69 percent in the last month alone.

It should be noted, however, that the gains Palantir has seen in 2023 have not brought it anywhere near its all-time highs. The stock’s peak closing price was $39 per share in January of 2021, more than double its current trading price.

Why Is Palantir Soaring?

One of the main drivers for Palantir this year has been its turn toward modest profitability. The most recent quarter was the second consecutive quarter of positive GAAP earnings for Palantir, and management now expects to turn a profit in each quarter of 2023. The production of positive earnings has understandably buoyed the stock, as investors can finally see a path forward for Palantir as a going concern.

Positive earnings aren’t the only good financial news coming from Palantir at the moment. In the last quarterly report, the company detailed revenue growth of 18 percent year-over-year. On an adjusted basis, Palantir also reported a net margin of 24 percent. This margin number is, however, drastically different from the unadjusted margin of just 1 percent.

For the full year, management expects revenues of $2.19-$2.24 billion. For reference, full-year revenue in 2022 amounted to just $1.91 billion. Given that Palantir lost $161 million last year and expects to generate adjusted income of over $500 million this year, investors are understandably interested in the company’s rapidly improving fundamentals.

Though this is not a new development, Palantir has also managed to maintain a fairly strong financial position. The company’s current assets stand at $3.68 billion, while its liabilities total only $879.9 million. Combined with its zero debt, Palantir’s strong balance sheet bolsters its potential as an investment.

In addition to its own improving business performance, Palantir has also been among the beneficiaries of a general surge in AI-focused stocks this year.

Following a dismal year in 2022, high-growth tech stocks with artificial intelligence exposure have collectively gained more than $4 trillion in overall market capitalization this year.

This surge is widely credited with pushing the S&P 500 into a new bull market, even though America’s broader economy is still struggling with inflation, labor shortages and the effects of high interest rates.

Palantir has taken full advantage of exploding interest in AI technology by introducing a new artificial intelligence platform for its existing customers. This platform could place Palantir in a unique position to meet growing demand for AI services from large enterprises and government institutions. Using this platform, Palantir hopes to be able to take a large share of the AI market before other software competitors have an opportunity to catch up.

Between the immense momentum of AI stocks, a move to profitability and the promise of a new AI platform, Palantir has seen explosive share price growth. It’s interesting to note that the same combination of momentum, improving fundamentals and potential growth catalysts have also driven similar run-ups for other AI stocks. NVIDIA, for example, rose by more than 25 percent in a single trading day after its last earnings report.

Will the Good Times Last for Palantir Investors?

Although Palantir has generated enormous gains this year, the stock may be primed for a correction. To begin with, Palantir is currently trading at over 75 times expected earnings and 17 times sales.

While the company’s future growth may eventually justify this premium pricing, investors could be taking a considerable risk by buying the stock at such high multiples.

There is also a strong possibility that the current surge in AI stocks will lack staying power. With investors piling into practically every stock associated with AI, the risks of both overvaluation and an eventual rush for the exits are growing steadily.

This phenomenon has already been compared to the dot-com bubble. While only time will tell if the comparison is apt and how badly Palantir will suffer if the bubble bursts, it seems unlikely that the stock would be unaffected by a general AI selloff after surging heavily on investor enthusiasm for the technology.

A final primer for a possible correction in Palantir’s share price is the competitive landscape in the AI world at the moment. With so many large companies jostling for position in a market that is experiencing its first wave of meaningful commercial adoption, it’s difficult to predict who the long-term winners will be. Palantir’s experience in handling enormous data sets and readiness to introduce a new platform for AI functionality may give it an early lead, but there’s no telling how robust this early advantage will be.

Despite the potential for a short-term correction, the long-term investment thesis for Palantir remains a compelling one. If the company’s new AI platform is successful, it could continue to generate rapid revenue growth while also expanding earnings. Given that Palantir has only recently achieved a low level of profitability, it’s possible that future growth could close the gap between its price and its ability to generate reliable cash flows.

At the moment, however, the stock’s high degree of volatility and the uncertainties surrounding it likely make it too risky for all but the most risk-tolerant growth investors. If the stock does fall amid a more general AI correction, investors may find more reasonably priced entry points to buy into a company that seems to have a good deal of legitimate long-term potential.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.