Palantir (NYSE: PLTR) is one of the popular stocks in the U.S. market that retail investors are paying attention to because this data mining company integrates two trending topics – the 'military' and 'artificial intelligence.'

Initially, Palantir was seen as a stock associated with the military concept, as its business primarily serves the U.S. Department of Defense, including entities such as the FBI, NSA, and even involvement with the CIA. Reports suggest that their software has assisted the U.S. military in locating individuals like Osama bin Laden.

By 2023, Palantir has undergone a transformation into an AI concept stock. Thanks to the growth potential of their Artificial Intelligence Platform (AIP), some investment institutions even liken it to the 'Messi' of artificial intelligence, suggesting that the stock is a "bull case model".

Since the beginning of this year, Palantir's stock price has increased over 200% (As of November 10, 2023), largely driven by optimistic expectations for its AI opportunities. The question is whether this momentum can be sustained.

This article will take everyone deep into understanding this mysterious data mining company—exploring the reasons behind its stock price fluctuations, identifying key financial metrics to watch, and examining the opportunities and risks the company might face in the future.

Palantir's stock has been on a roller-coaster ride

Palantir is a highly volatile technology stock that can be divided into three phases since its debut in 2020:

• Meme stock hype (Sep 2020 - Jan 2021)

Palantir went public on the NYSE on September 30, 2020, opening at $10 and closing at $9.50. At that time, the market believed that software companies like Palantir would dominate the data platform market in the future. Many institutional investors turned their attention to the stock. For example, ARK Invest led by Cathie Wood bought the stock in Q4 2020.

This move increased Palantir's popularity on the Reddit community, attracting many retail investors and driving up the stock price, making it a meme stock. In January 2021, the meme frenzy peaked, and Palantir's stock price reached a historical high of $45 per share, a 350% increase from its IPO price.

• Decline of meme stock hype (Jan 2021 - Dec 2022)

However, the good times did not last. As Palantir's stock price soared, combined with the overall high valuations in the tech industry, after the decline of the meme stock hype, short interest in Palantir increased, reaching a peak of 102 million shares in 2021.

Entering 2022, concerns about Palantir's growth prospects, coupled with a challenging overall market environment, led to a significant decline in Palantir's stock price.

From the peak of $45 in January 2021 to the lowest point of $5.8 in January 2023, the drop was as high as 87%, leaving investors feeling frustrated.

• AI hype (Jan 2023 - Present)

After January 2023, the situation took a turn. With the overall market rebound and AI hype, Palantir's stock experienced another astonishing surge. As of November 10, 2023, Palantir's year-to-date stock increase has exceeded 200%.

Investors may wonder, is this AI hype just speculation for Palantir, or does it genuinely empower the company's growth?

Is AI a new growth driver for Palantir？

As a tech growth stock, investors are closely eyeing Palantir's potential for expansion. To gauge this, they often turn to a crucial financial indicator known as the revenue growth rate.

Over the past year, Palantir has a concern—slowing revenue growth. According to investors.com, in 2022, the company's revenue growth decelerated to 24%, a notable decline from 40% in 2021 and 47% in 2020.

Some investors are now optimistic that AI could be the new driver of growth for Palantir.

At the beginning of this year, Palantir launched a new AI platform called AIP. In just five months, more than 300 companies started using it, from different industries like energy, finance, and healthcare.

Source: Palantir Q3 2023 Business Update

It appears that the AI platform is contributing to the company's revenue growth. In the third quarter of 2023, Palantir experienced an acceleration in revenue growth, with a 17% year-over-year increase in total revenue and an impressive 23% growth in commercial revenue. Following the Q3 earnings, Palantir's stock price surged by 20%.

However, investors need to be cautious because only looking at a portion of the year might not provide the complete picture. It's important to continue monitoring to see if AI will continue to drive Palantir's growth.

Palantir has achieved profitability for four consecutive quarters

Another important metric for investors to consider is Palantir's profitability, specifically measured by gross profit margin and net profit.

A higher gross profit margin generally indicates stronger product competitiveness. In the third quarter of 2023, Palantir's adjusted gross profit margin reached 82%, showing a 2% year-on-year growth. This positive signal may suggest that Palantir's products have a competitive edge in the data analysis market, allowing for either higher pricing or more cost-effective production.

Source: Palantir Q3 2023 Business Update

Furthermore, Palantir has relatively stable profitability over the past year. In the third quarter of 2023, Palantir's net profit under GAAP reached $71.5 million, a significant improvement compared to the $123.9 million loss in the same period last year.

Since turning a profit in Q4 last year, Palantir has achieved profitability for four consecutive quarters. This may suggest that the company has managed costs well.

During the Q3 2023 earnings call, CFO David Glazer stated, 'In short, we've been able to flatline expenses for four consecutive quarters while investing significantly in our products, including AIP, and reaccelerating our revenue.'

Source: Palantir Q3 2023 Business Update

Potential for Joining the S&P 500 index

Analysts at The Motley Fool suggest that Palantir's stock, having achieved profitability for four consecutive quarters under GAAP accounting standards, meets the criteria for potential inclusion in the S&P 500 Index. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on US stock exchanges.

Being included in this index means the stock will receive increased attention, attracting more potential investors. Additionally, there's a higher likelihood that more index funds tracking the S&P 500 will include the stock in their portfolios, thereby enhancing the stock's liquidity.

Although Palantir meets the requirements for inclusion in the S&P 500 index, it doesn't mean it will be automatically added. The inclusion of the stock in the S&P 500 still requires the approval of the committee, so inclusion is not guaranteed.

Valuation

One risk for Palantir is that its stock is expensive. The Motley Fool analysts experts think Palantir costs more compared to other growth stocks like ServiceNow and HubSpot.

According to the Motley Fool article published on November 5, 2023, Palantir's forward price-to-earnings ratio is 75x, while ServiceNow and HubSpot have lower ratios at 47x and 65x. Even though Palantir is expected to grow, its price might already include that.

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