The most resilient AI stock? What's next for Palantir

$Palantir (PLTR.US)$, a company that merges the defense and artificial intelligence sectors, has become one of the most closely watched stocks in the market. The company is set to be included in the S&P 500 index, with the inclusion scheduled to take effect on September 23.

After hitting a low in 2022, Palantir's stock has been on a consistent upward trajectory, rebounding by 167% in 2023 and doubling this year.

During the market correction since August, Palantir has shown remarkable resilience. Since August 5, the company's stock has surged over 40%, outperforming its peers in the AI sector.

Can this momentum continue? This week's "Opportunity Mining" will take a look at this company.

Across government and business sectors

Founded in 2003, Palantir is named after the seeing-stones in Tolkien's "The Lord of the Rings" series. Co-founded by Peter Thiel, one of PayPal's founders, the company has a team with significant PayPal roots.

Palantir is renowned for its big data analytics but differs from most SaaS companies. It provides highly customized products.

Initially, its major clients were primarily from the government and military sectors. Notable cases include assisting the military in locating and killing al-Qaeda leader Osama bin Laden and helping law enforcement agencies uncover Bernard Madoff's $65 billion Ponzi scheme.

The company later expanded its services to the commercial sector. In 2016, Palantir launched a data platform for enterprise users, and its commercial revenue has been steadily increasing. As of Q2 2024, revenue from government contracts accounted for 54.7% of total income, while commercial revenue made up 45.3%, reflecting a balanced portfolio.

Palantir has also actively embraced the AI wave. In April 2023, the company launched its Artificial Intelligence Platform (AIP). It combines AI with big data analytics to help government agencies and businesses process data more efficiently, streamline processes, and make intelligent decisions.

Wedbush noted that AIP has already driven growth in the commercial sector and is expected to gain more traction in government businesses. With more clients seeking to add AI capabilities, Palantir is poised to secure numerous deals supported by AIP, marking the beginning of a multi-year growth cycle.

High growth, high valuation

In August, Palantir released its Q2 financial report. Total revenue for Q2 2024 was $678 million, up 27.2% year-over-year, exceeding market expectations of $652 million. Earnings per share were $0.06, up 500% year-over-year, beating the market expectation of $0.03. The company also raised its full-year revenue guidance to $2.74 billion to $2.75 billion.

During the earnings call, management acknowledged the skepticism the company has faced over the years. Critics doubted Palantir's ability to become profitable and expand its revenue effectively. However, the company has achieved seven consecutive quarters of profitability, with the AIP platform driving accelerated growth.

Palantir's valuation is significantly higher than its peers. SaaS companies are often valued using the Price to Sales (PS) ratio.

Palantir's current PS ratio is 32.15, placing it in the 75th percentile of its historical range. This is significantly higher than the industry average of 9.69.

(Path: Detailed Quotes Page > Company > Financials > Company Valuation)

Source: moomoo. Data as of market close on September 13, 2024. Investing involves risk and the potential to lose principal. Past performance does not guarantee future results.

Mizuho analysts stated that Palantir would need more consistent performance to justify such a high valuation. Investment bank Monness, Crespi, Hardt & Co. also noted that while the company has a healthy outlook, the recent "AI frenzy" has pushed its valuation to unreasonable levels.

Technical analysis and potential strategies

Since resuming its uptrend, Palantir has remained within an ascending channel, recently breaking above the upper boundary with the boost from its impending inclusion in the S&P 500. The breach of the channel could indicate further upward movement.

Generally, a breakout above the upper channel line is considered a bullish signal.

However, breakout trades might carry higher risks as the market could issue false signals. Investors could consider waiting for a pullback to confirm the breakout before entering trades.

Source: moomoo. Data as of market close on September 13, 2024. The company mentioned is for illustration purposes only, and any statement involved does not constitute investment advice.

Volatility analysis tools show that as of the close on September 13, Palantir's implied volatility is relatively low.

Significant company events or major market events (such as Federal Reserve meetings) typically cause volatility to rise. Palantir's inclusion in the S&P 500 later this month could also amplify volatility.

Implied volatility values, IV Rankings, and IV Percentiles are theoretical estimates, and the actual market conditions may not always align with the theoretical information shown. Investors should exercise caution and use multiple sources of information when making investment decisions.No guarantee or assurance using any tools or data provided on the moomoo app will result in investment success or reduce investment risk.

In a risk-neutral scenario, low implied volatility suggests relatively low premiums, theoretically favoring option buyers.

If you are optimistic about the company's prospects, consider buying call options (Long Call). If you anticipate a downturn, buying put options (Long Put) could be viable.

Additionally, if you're not sure about the direction of the movement but expect increased volatility, strategies like buying a straddle (Long Straddle) or a strangle (Long Strangle) could be considered.

However, options carry higher risks and volatility compared to stocks. Interested investors are advised to thoroughly study options before trying them out.

Related risks

Intensifying Competition: Palantir's main competitors include $C3.ai (AI.US)$ and $Snowflake (SNOW.US)$. Earlier this year, Palantir competed with C3.ai for the U.S. Army's TITAN project contract, ultimately securing a $178 million deal. Snowflake primarily provides big data services to enterprise users.

Customer Concentration: Most of Palantir's revenue comes from large clients, especially government sectors. MorningStar also noted that despite years in the commercial space, client acquisition rates are relatively low, with the company having just over 200 commercial clients.

Additional Disclosures: This content is also not a research report and is not intended to serve as the basis for any investment decision. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Furthermore, there is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.

Options trading involves substantial risks and may not be suitable for all investors. Losses could potentially exceed your initial investment. Please also consider our US Options Product Disclosure Statement (PDS), US Options Target Market Determination (TMD) and OCC's Characteristics and Risks of Standardized Options available on the website before trading options.