Of the top-performing names from 2023 that Morningstar covers, Palantir (NYSE:PLTR) stock had the fifth-best return, up 167.5% despite losing 14% in December.
As Morningstar pointed out, Palantir and Nvidia (NASDAQ:NVDA) were successful because of their mutual focus on AI. Shareholders from both companies could have another strong year, unless something disrupts AI in 2024.
Except for Coinbase Global (NASDAQ:COIN) at 2.17, Palantir has the highest price-to-fair value ratio of the top five-performing stocks in 2023, at 1.32, which suggests PLTR, at least in their mind, is overvalued by 32%.
So, who should buy PLTR stock in 2024? I’d say anyone with above-average risk tolerance and a 3-5 year holding period. Anyone not meeting these two criteria could be sorely disappointed because PLTR is not well-loved on Wall Street, which means its “Wall of Worry” is steeper.
I grew to like Palantir CEO and co-founder Alex Karp’s long-term strategy for the big data software company.
This could be the year analysts start to take it seriously. Here’s why.
Ignore Government Business for Now
One big issue against Palantir is the fact it relies so heavily on government contracts. In Q3 2023, they were $308 million, 12% higher year-over-year, accounting for 55.2% of its $558.2 million overall. That was down 210 basis points from Q3 2022.
However, its overall revenue in Q3 2023 was 16.8% higher because of a 23% increase in its commercial revenue, which accounted for nearly 45% overall. Its U.S. commercial revenue grew 33% YOY in the quarter, accounting for 46.2% of its overall commercial revenue.
So, based on $87.2 million in U.S. commercial revenue in Q3 2022 [calculated as $116 million in Q3 2023 divided by 1.33 (the 33% YOY increase)] divided by $204.0 million in Q3 2022 commercial revenue, its U.S. commercial revenue as a percentage of overall commercial revenue increased by 350 basis points in Q3 2023 from 42.7% a year ago.
As long as it continues to grow commercial business (34% YOY, including 37% in the U.S. for 2023) increased revenue and profits will come.
Four Quarters of GAAP Profits
In Q3 2022, Palantir’s GAAP loss was $124 million. Since then, it reeled off GAAP quarterly profits of $31 million, $17 million, $28 million, and $72 million in Q3 2023. That’s $148 million in trailing 12-month net income. As a result of the four consecutive quarters of GAAP profits, it is eligible for the S&P 500. That’s something to look forward to in 2024.
The company said in its Q3 2023 press release that it expects $2.218 billion in revenue in 2023 at the midpoint of its guidance. Based on its net income margin in the third quarter of 12.8%, it could earn as much as $284 million in GAAP profits in 2023. While not massive, they’re trending in the right direction.
As of September 30, Palantir’s TTM adjusted free cash flow was $501.5 million, a margin of 24%. That’s very close to Apple’s (NASDAQ:AAPL), which was 26% in fiscal 2023 (September year-end) and 21% in the latest quarter.
So, despite getting far less love from analysts than Apple, Palantir is inching closer to the free cash flow generation capabilities of the iPhone maker and other favorites of Wall Street.
This tells me that Palantir’s valuation isn’t nearly as expensive as some might think. Further, because of the double-digit cooldown in December, its shares are trading lower than in early November.
The Bottom Line on PLTR Stock
Palantir currently operates four major platforms: Gotham, Foundry, Metropolis, and, as of mid-September, AIP, its AI platform. As of Q3 2023, it had over 150 AIP users. When it reports Q4 2023 results in February, investors should expect that number to be significantly higher.
If you’re a contrarian investor who doesn’t mind above-average volatility, I’m not sure how to avoid Palantir’s compelling AI story in 2024.
It’s a buy for aggressive investors.
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.
