Will This Hot Artificial Intelligence (AI) Stock Keep Its Momentum or Flop?

In the future, investors may remember 2023 as the year Palantir (PLTR -3.23%) began its comeback. After falling by 85% from its peak at one point late in 2022, it has started rebounding, rising by more than 140% since this year began. 

However, the artificial intelligence (AI) stock achieved most of those gains in the spring and early summer, and it has since plateaued. The question for investors is whether the stock has just paused before its next move higher or if it’s destined to retest its all-time lows from 2022.

What prompted the Palantir comeback

Palantir staged its comeback by leveraging its AI connection. Its ability to analyze data and deliver insights has long hinged on AI, which helps the system continuously improve by applying feedback and user data. As a result, both governments and commercial enterprises have successfully deployed this technology to discover insights and improve efficiency.

These capabilities prompted research firm IDC to name Palantir the No. 1 artificial intelligence platform ranked by revenue and market share. Forrester Research also recognized Palantir as an AI and ML leader. In its 2022 report, Forrester gave Palantir its top score in several categories, citing its ability to solve complex problems with “best-in-class, cutting-edge technology.”

Moreover, it took its AI capabilities to a new level earlier this year when it introduced its Artificial Intelligence Platform (AIP), which allows organizations and enterprises to deploy large language models (LLMs) alongside internal systems.

Palantir’s recent results

The release of AIP led to impressive gains in the stock, particularly between early May and the beginning of August when Palantir rose by as much as 170%. The release of the latest version of OpenAI’s ChatGPT also led to a more generalized interest in AI stocks, with AI companies such as C3.ai and Nvidia also rising significantly.

However, many of these stocks have corrected since early August, including Palantir. It is still down almost one-fourth from its 52-week high and over 60% from its high in 2021.

Also, Palantir did not begin deploying AIP for its clients until the middle of 2023’s second quarter. Hence, the public will not catch a meaningful glimpse of AIP’s sales until the company releases its Q3 earnings on Nov. 7, if not later.

Nonetheless, Palantir has continued to register considerable customer growth. In the second quarter, its customer count grew 38% year over year, including an 8% rise sequentially from Q1.

Despite those increases, its Q2 revenue grew by just 13% year over year to $533 million. Also, Palantir reported net income of $28 million, making Q2 its third consecutive quarter with a positive result on that metric.

Admittedly, most of its profit came from interest income since operating income was only $10 million. Still, management forecasts profits for the next two quarters, and given the high initial interest in AIP, its operating income should improve over time.

Image source: Palantir Technologies.

For some, the relatively low revenue growth compared with the increase in the number of customers seems odd. However, competition and the company’s dependence on large government contracts could have weighed on the results.

Also, last year, Palantir management was forecasting 30% annualized revenue growth through 2024. For 2023, that would have translated into $2.5 billion in annual revenue rather than the $2.2 billion the company recently projected.

Moreover, with the company repeatedly falling short of that earlier estimate (13% revenue growth for Q2), investors may have turned on the stock following its Q2 report in August.

Will the momentum continue?

Palantir’s relatively slow growth in revenue is concerning, especially since it fell below the company’s earlier guidance for 30% growth. Despite such concerns, Palantir stock is likely to resume its growth.

Even if the profit is mostly interest income for now, Palantir’s rising profitability should give the company more control over its destiny. Also, since investors have yet to see a full quarter of sales driven by AIP, that 30% revenue growth forecast may not be entirely out of reach. If Palantir reports a strong performance on Nov. 7, it could be the catalyst the stock needs to move higher. 

Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.