Should You Buy the Dip in Palantir Stock?
Earnings season is in full swing, and technology investors are eager to see if the hype surrounding artificial intelligence (AI) is warranted. Megacap tech behemoths such as the "Magnificent Seven" are undoubtedly the primary focus for Wall Street analysts.
However, other players are emerging within the AI realm and giving big tech a run for its money. Over the last year, Palantir Technologies (NYSE: PLTR) has become a popular name at the intersection of AI and enterprise software-as-a-service (SaaS) developers.
On May 6, Palantir reported a highly anticipated first-quarter earnings report. In the two weeks leading up to earnings, Palantir stock experienced some momentum -- soaring 20%.
However, following the report, shares of Palantir fell over 15% and have yet to recover to pre-earnings levels. Is now an opportunity to buy the dip in Palantir stock?
Let's find out.
What goes up must come down
Palantir rocketed onto the scene in 2023 following the release of its Artificial Intelligence Platform (AIP). Buzz around AIP spread like wildfire, largely thanks to an unconventional lead generation strategy at Palantir. The company hosts immersive seminars called "boot camps" during which prospective customers can demo Palantir's software products and identify a use case around AI.
Since releasing AIP last April, Palantir has hosted over 900 boot camps. As a result, the company has accelerated customer acquisition -- leading to higher revenue, margin expansion, and rising free cash flow.
Like many of its peers, investors poured into Palantir stock last year -- sending shares soaring over 160%.
Considering much of the AI-driven momentum from last year has carried over into 2024, it's not surprising that Palantir stock continued to witness some momentum. However, since the stock cratered after the company's first-quarter report, investors may be wondering if they should run for the hills or take advantage of the depressed prices.
AI is the name of the game
Although the boot camp strategy has proven popular, savvy investors should take a look underneath the hood and actually assess Palantir's measurable financial results.
For the quarter ended March 31, Palantir's revenue increased 21% year over year to $634 million. The company's nongovernment business contributed greatly to growth in the first quarter, rising 27% year over year.
Perhaps more important than revenue is Palantir's margin expansion. The company's operating income of $81 million was a 20-fold increase compared to the first quarter of 2023. The rising operating leverage has helped Palantir consistently generate positive net income -- with Q1 2024 marking the sixth consecutive quarter of profitability on a generally accepted accounting principles (GAAP) basis.
Although the above results are impressive, Palantir is doing a lot of work behind the scenes to forge further avenues for growth. Namely, the company's recent partnership with Oracle has me particularly excited -- and this has yet to spur any tangible gains for Palantir.
Is it time to buy the dip in Palantir stock?
With an overall robust operation, it may seem counterintuitive as to why Palantir shares are experiencing a sell-off. The simple answer: Expectations were sky high. While the company is performing from a position of strength, investors have reached a point where they want more.
My take on this is that some investors are being unrealistic. AI is in its early days, and it's going to be years before the biggest beneficiaries emerge. For this reason, it's not entirely surprising that Palantir witnessed a sell-off following an otherwise terrific earnings report.
Palantir has reached a point of consistent profitability, and AIP is proving to be a prolific tool penetrating both the private and public sectors across myriad use cases. I suspect expectations will continue to remain high as Palantir is competing with some of the largest enterprises in the world when it comes to AI-powered software.
Moreover, with a price-to-sales (P/S) ratio of 21.2 and a forward price-to-earnings (P/E) ratio of 67.1, Palantir shares aren't exactly cheap -- even for a growth stock. With that said, I think investors with a long-term time horizon may still want to consider scooping up some shares right now since the company is firing on all cylinders and its growth roadmap is highly compelling.
Should you invest $1,000 in Palantir Technologies right now?
Before you buy stock in Palantir Technologies, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $553,880!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 13, 2024
Adam Spatacco has positions in Palantir Technologies. The Motley Fool has positions in and recommends Oracle and Palantir Technologies. The Motley Fool has a disclosure policy.
Should You Buy the Dip in Palantir Stock? was originally published by The Motley Fool
