The Nasdaq-100 Unveils Its Most Recent Inclusion. This Specific Stock has Surged an Impressive 1,090% Since the Start of Last Year, and Remains a Wise Investment Option, Suggests a Certain Financial Expert from Wall Street, Looking Towards 2025.
The Nasdaq Composite is a well-known stock index in the United States, primarily focusing on tech-related companies. It monitors the performance of over 3,000 stocks listed on the Nasdaq exchange. The Nasdaq-100, a subset of the index, specifically tracks approximately 100 of the biggest non-financial companies on the Nasdaq stock market. To be considered for inclusion in the Nasdaq-100, a corporation must meet certain requirements such as exclusive listing on the Nasdaq exchange, significant liquidity, lengthy exchange listing, and availability of a substantial number of tradeable shares.
On Dec. 13, following the market closure, the index declared its annual rebalance. Palantir Technologies (PLTR), a company known for its work in generative artificial intelligence (AI), was selected to join the Nasdaq-100. This addition will go into effect the day before Christmas, Dec. 23. Ever since AI gained popularity last year, Palantir's stock value has risen exponentially by 1,090%. The company's extensive experience in AI has made it the preferred choice for AI solutions, thereby aiding its inclusion in the index.
Despite the recent surge, some investors are reluctant to invest in the stock due to its expensive valuation. However, a Wall Street analyst believes that this cautionary view might be short-sighted. It's worth examining the reasons behind Palantir's recent dramatic increase and determining if there's any further potential for growth.
Pioneering AI before it was trendy
Palantir, established following the 9/11 tragedies, believes that appropriate AI algorithms could identify seemingly disparate data points to expose a potential terror threat before it materializes. The company swiftly gathered a following within the U.S. intelligence community and its allies, and law enforcement and military agencies quickly adopted its solutions.
Gradually, Palantir expanded its offerings to include data mining, analytics, and AI knowledge to corporate clients, providing tailored solutions for their data-driven needs. The popularity of AI last year drew in numerous customers seeking solutions. Palantir successfully developed the Artificial Intelligence Platform (AIP) to meet this demand. AIP integrates AI with a company's operational data to offer real-time, company-specific solutions to current issues.
To bridge the knowledge gap prevalent in many companies, Palantir created boot camps where clients collaborate with Palantir engineers to develop customized solutions. Evident in Palantir's financial reports, this eliminates the primary hurdle faced by businesses aiming to implement AI.
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In Q3, Palantir generated revenue of $726 million, marking a 30% annual increase and a 7% sequential improvement. Earnings per share (EPS) saw a remarkable 100% surge to $0.06, resulting in Palantir's eighth consecutive profitable quarter. While these numbers are impressive, they merely scratch the surface.
Palantir's U.S. commercial segment, which primarily contributes to AIP revenue, grew a whopping 54% annually and increased its remaining deal value (similar to backlog) by 73%. The customer count for this segment also skyrocketed by 77%.
It's important to note that Palantir's government revenue, the backbone of its operations, also saw a 40% annual increase and a 15% sequential growth.
Another noteworthy aspect is the accelerating number of contracts Palantir is securing. In Q3, Palantir signed 104 deals worth at least $1 million, including 36 deals exceeding $5 million and 16 deals worth over $10 million. These agreements were often finalized mere weeks after a customer finished a boot camp.
The company might only just be tapping the potential demand. According to global management consulting firm McKinsey & Company, the generative AI market is projected to be worth a colossal $2.6 trillion to $4.4 trillion over the next decade. With its strategic position, Palantir stands to profit abundantly from these thriving secular trends.
The elephant in the room
While there's no denying Palantir's bright future, some investors worry that the stock might have raced ahead of itself. This concern is echoed by Wall Street, with only 4 out of 20 analysts offering a positive rating, 9 remaining neutral, and the remaining 7 recommending a sell or underperform. The main reason cited for a bearish stance is the stock's lofty valuation.
However, looking at the numbers, one might question whether traditional metrics suffice for evaluating such a high-growth company. For instance, Palantir's forward price/earnings-to-growth (PEG) ratio – which factors in the company's accelerating growth – clocks in at 0.63, well below the standard 1 threshold for an undervalued stock.
Veteran tech analyst Dan Ives from Wedbush remains optimistic about Palantir, keeping an 'outperform' (buy) rating and a $75 price target, despite the stock surpassing this mark. Ives shows growing faith in Palantir's innovative AIP strategy and the increasing prevalence of AI in various industries over the next 12-18 months. He anticipates Palantir experiencing extraordinary demand as more businesses incorporate and expand the use of the company's AI technologies.
Additionally, Ives suggests that Palantir might develop into "the next Oracle." Given Oracle's current market value of $494 billion, this implies a potential increase in value for Palantir by 188%. Admittedly, this is a daring prediction, but it highlights the potential that lied ahead. It's important to note that realizing this vision would take some time.
On the contrary, it's understandable for some investors to find Palantir's valuation steep. For those who still perceive Palantir as overpriced, an option is to invest in a minimal initial stake without causing significant financial strain, with the intention to boost it when the stock plummets, as it likely will. Alternatively, implementing 'dollar-cost averaging' – buying fixed dollar amounts of the stock at regular intervals – can result in a lower overall investment cost.
Palantir Technologies may not suit every investor's appetite. However, for those comfortable with taking on a bit more risk for the possibility of extraordinary returns, Palantir presents itself as a golden opportunity at a critical industry juncture, promising the potential for lucrative gains.
After the announcement of Palantir Technologies' inclusion in the Nasdaq-100, some investors are considering investing in the company, despite its expensive valuation. This is because the Wall Street analyst believes that the cautionary view towards Palantir's stock might be short-sighted, given its significant growth potential in the generative AI market.
To diversify their investment portfolio and capitalize on the potential growth of AI, many investors are looking for opportunities in AI-focused companies. Palantir, with its extensive experience in AI and its recent exponential stock value rise, has become an attractive option.
This investment opportunity aligns with a broader trend, as global management consulting firm McKinsey & Company projects that the generative AI market will be worth between $2.6 trillion to $4.4 trillion over the next decade. With Palantir's strategic position in this market, many investors see the potential for substantial returns.
