Growth stocks have risen over the past few years, with many well outpacing the S&P 500earnings of. Certain players soared into the triple and even quadruple digits as investors rushed into companies focused on artificial intelligence (AI), quantum computing — and even players involved in high-growth healthcare fields such as weight-loss drugs.
Investors also flocked to growth stocks amid optimism about the current bull market and a better interest rate environment — The Federal Reserve has been cutting rates recently, a move that makes it easier for companies to borrow and expand. All of this has made growth stocks popular with investors, and one stock in particular continues to crush the market.
This player, one that is already winning in the AI space, has increased by 2,700% over the last three years. Can the gains continue? Let’s find out.
Image source: Getty Images.
This company is not new to the scene; instead, it has been around for over 20 years. But the AI boom boosted revenue growth and brought this technology player into the spotlight. The company I am talking about is Palantir Technologies(NASDAQ: PLTR).
Several years ago, Palantir was best known for its contracts with governments. The company’s software platforms help customers aggregate often-hard-to-access data, analyze it, and put it to work — several government departments and agencies have found this useful, and that’s translated into steady growth for Palantir.
But the launch of Palantir’s artificial intelligence-driven product, called the Artificial Intelligence Platform (AIP), more than two years ago represented a turning point for the company. Revenue growth took off as this system offered customers — eager to get into AI history — a way to immediately apply AI to their needs.
Palantir launched AIP bootcamps to introduce potential customers to the service, and these resulted in significant contract wins. For example, a healthcare company completed a bootcamp in April of last year and then signed an $88 million contract with Palantir a month later.
And speaking of companies, they have become key growth drivers for Palantir – so the software player is no longer reliant on government contracts for growth. Instead, the government and commercial businesses are each generating huge revenue gains quarter after quarter. Business in the US is particularly strong, with US government revenue advancing 52% in the last three months and US commercial revenue up 121%.
Palantir’s US commercial business included 14 customers about five years ago, and now the company has hundreds of commercial customers – and the value of US commercial deals has reached records. In the three months, it increased by more than 340% to $ 1.31 billion. So we can see how far this business has come, and considering the demand for AI, it is likely that the positive momentum will continue.
The company has also expertly balanced its growth ambitions with profitability, as we can see through its Rule of 40 score of 114%. A score of at least 40% indicates a company is doing well here, so Palantir’s levels look particularly impressive.
One problem Palantir has faced in recent quarters, however, is valuation. As the stock exploded higher, so did its price tag, leading some investors to worry about whether it could sustain such levels. In recent weeks, the valuation has decreased, although it is still at high levels.
PLTR PE (Forward) Ratio Data from YCharts
So now, especially at the beginning of a new year, it is logical to ask if this AI star will continue to beat the S & P 500. It is impossible to predict short-term movements, of course, but it is reasonable to be optimistic about the trajectory of Palantir – especially if we take a long-term view.
The recent drop in valuation may encourage some investors to get into this growth story. And it’s also worth noting that many technology companies go through periods of high valuation in their early days of growth – so if you buy at today’s levels and hold for a few years, you may see a valuation even out.
Palantir should continue to benefit from the quality of the technology it has built over the years and from the continued demand for AI-driven products and services. Investors recognized these strengths, which is why the stock took off — and over time, it could continue to crush the market.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
This Growth Stock Continues to Crush the Market was originally published by The Motley Fool
