Palantir: The Good, The Bad, and The Potentially Ugly

Key Points

• Palantir has caught the AI boom, and shares have reversed all of 2022’s downtrend. 
• Some analysts are concerned about volatility in the near term. 
• The longer-term turnaround feels genuine, though, and the opportunity is real. 

The past few weeks have seen Palantir Technologies Inc NYSE: PLTR shares rally as much as 135%. It meant they’ve effectively undone all of 2022’s damage and have them back trading at the same levels where they ended 2021. From that perspective alone, you’d be inclined to think Palantir investors are onto a good thing, but it’s not as simple as that.

Palantir stock started the year at all-time lows, and even after the past two months of upward momentum and triple-digit percentage gains, they’re still down 65% from 2021’s all-time high. 

So how are those of us on the sidelines meant to weigh up the opportunity here? Are we looking at a stock that’s had its day in the sun going through a dead cat bounce, or is this the start of a complete turnaround and recovery? Let’s take a look at some of the things going on with the Denver headquartered company and see what’s what. 

Achieving Profitability

Starting with the positives, the past two quarters have seen the company report its first profitable, albeit barely, earnings since going public in October 2020. Suddenly seeing their EPS numbers in black print is a welcome change from the previous nine quarters; all saw red and is indicative of a wider shift in the right direction. 

The irony here, of course, is that Wall Street had no problem sending Palantir shares to record highs when they were posting quarterly losses, but of course, that was when interest rates were at all-time lows. Investors at the time could afford to back riskier growth plays like Palantir on the basis that the companies could borrow all the cheap money they needed to scale to profitability, but the higher rate cycle we’re in now makes that much more difficult.

Still, unless you’ve been holding the bag since 2021, this is all in the rearview mirror. The fact is Palantir is turning over record quarterly revenues right now, as well as quarterly profits. Given the pop in shares, Wall Street is clearly viewing this as a brand new chapter, as do we. 

Take Bank of America, for example. The team there recently reiterated their bullish stance on Palantir shares in light of the AI boom. They feel Palantir is in a prime position to take advantage of the opportunity there, as it offers a solution that works well with different large language models while meeting strict security, privacy, and regulatory requirements.

Success stories from the company’s existing customer base, including the US Special Operations Command and the US Department of Defense, have reinforced their optimism. Given the depth of experience Palantir already has with government bodies like these as customers, the Bank of America team sees them as being five years ahead of the competition already in terms of generative AI capabilities. 

Potential Volatility

At the same time, they also acknowledged the risk of the AI boom turning into an AI bubble. The rapid rise in share price lends weight to this argument and is a fair reason for prospective investors to be cautious. It was a theme picked up on by the team over at Raymond James recently, who went so far as to actually downgrade Palantir shares to an Outperform rating from a Strong Buy. This isn’t as bad as a full move down to an Underperform or Sell rating, but it still tells us that Palantir’s current valuation might be getting a little frothy. 

However, at the same time, the Raymond James team boosted their price target to $18, matching Bank of America’s, which points to further upside in the region of 12% from where shares closed last night. Our take? Palantir has caught the AI wave, and rightly so. This means there’s a new long-term tailwind for investors to benefit from, but one that will also make it susceptible to short-term volatility and profit-taking. If you have a long-term investment horizon and the stomach for it, there’s an opportunity here.