Like many stocks in 2023, Palantir Technologies (NYSE:PLTR) was flying higher on cruise control until August hit, and then PLTR stock sputtered along for the next three months.
As I write this, its shares have lost 25% of their value in the last month. If not for a slight reassurance in the first two weeks of October, the losses would be considerably higher.
It’s been 17 months since I last discussed Palantir stock. It was May 5, 2022, to be precise. I suggested PLTR stock reached the bottom at around $10, but the bottom came six months later on Dec. 26, hitting $5.92. It’s up 190% so far this year.
“I continue to like Palantir despite the fact it’s having trouble generating a profit. However, if its healthcare business is any indication, patient investors should be rewarded soon enough,” I wrote on May 5. 2022. “PLTR stock remains a long-term buy for aggressive investors only.”
Today, PLTR stock is appropriate for more risk-averse investors. Gone are the days of near penny-stock status.
The Pathway to GAAP Profitability for PLTR Stock
In May 2022, profitability remained a struggle. However, with Q3 2023 results to be reported on Nov. 2, investors should monitor GAAP and non-GAAP profitability.
In August, when Palantir reported its Q2 2023 results, it had a GAAP net profit of $45 million for the first six months of 2023. Its outlook for the entire year said it would generate GAAP net income in Q3 and Q4.
CEO and founder Alex Karp said in his Q2 2023 shareholder letter, “We also delivered another consecutive quarter of profitability, our third in a row, as we continue on our path of sustained and durable earnings.”
Assuming that all four quarters will be GAAP profitable, it will have a streak of five consecutive quarters after it reports Q4 2023 results in February. That’s very important in its progress in generating consistent profits.
Morningstar.com expects Palantir’s long-term GAAP gross margins to be in the low-80% range, much higher than 78.6% in 2022. In the first half of 2023, its gross margin was just shy of 80%.
If it keeps this up, we’ll discuss double-digit net profits by 2025 or earlier.
Artificial Intelligence to Drive Revenue
Palantir’s AIP (artificial intelligence platform) will be a significant revenue driver for the company. As Karp stated in its Q2 2023 shareholder letter, it only launched AIP in May. There is plenty of time for it to turn into another Gotham or Foundry, its other platforms.
“The platform already has users across more than one hundred organizations, including some of the largest enterprises in the world from the healthcare, finance, automotive, and energy sectors,” Karp stated.
Because of the interest in AI, Karp has said that the interest in AIP is unlike anything seen in the past 20 years. In August, it said it was discussing with more than 300 organizations about installing AIP. His Q3 2023 letter and conference call will address the customer growth.
Assuming it delivers a GAAP profit, it will become eligible to include in the S&P 500. As S&P 500 funds buy PLTR to track the index, its share price could increase.
The big question mark, according to Morningstar’s analysis, is whether Palantir can successfully execute its growth strategy for AIP.
“While Palantir has landed high-value commercial and government clients over the years, we have found the executive team’s execution to be questionable at best,” Morningstar’s Tom Lauricella stated on Oct. 30.
“The firm’s sales strategy has led to relatively poor customer acquisition, despite being in the commercial space for many years. Palantir’s commercial customer count is only slightly more than 200.”
So, its ability to turn the page on poor sales execution could be the difference between a $15 stock and a $150 stock in 2024.
Analysts Don’t Like PLTR
Of the 20 analysts covering Palantir, only four rate it “Overweight” or an outright “Buy,” while nearly half (8) rate it Underweight or an outright Sell. However, most of the skepticism has to do with valuation concerns.
Based on its 2024 earnings per share estimate of $0.27, it is trading at 55x its 2024 earnings. That’s pretty high for a company that has only recently removed the training wheels.
Frankly, I’ve always felt like analysts unfairly treated Palantir because it got most of its revenue from government contracts, not the more lucrative commercial ones.
As of June 30, Palantir’s commercial revenue in the first half was $467.9 million, or 44% overall, down from 45% a year earlier, so there is some validity to those concerns. However, the commercial segment finished the second quarter with 161 customers, 35% higher than at the end of Q2 2022.
If it continues to grow its commercial customers by 35% a quarter over 2-3 years, I don’t see how the share price isn’t significantly higher.
Never say never, but the days of a single-digit share price appear in the rearview mirror.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.