Josh Brown and Sean Russo of Ritholtz Wealth Management describe investing in AI software stock Palantir (PLTR) as a high-octane roller coaster ride due to its extreme volatility and significant drawdowns, yet it recently hit near-record highs. Fundamentally, Palantir demonstrates explosive revenue growth, a strong ‘Rule of 40’ score, and expanding commercial business, particularly in its AI and data platforms. Investors are paying a premium for its growth, but a deeper look reveals it’s ‘cheaper’ at its current highs compared to previous peaks due to substantial revenue increases.
In the world of high-stakes investments, Josh Brown, along with Sean Russo of Ritholtz Wealth Management, likens the experience of investing in an AI software stock like Palantir (PLTR) to riding the Formula Rossa, the world's fastest roller coaster at Ferrari World in Abu Dhabi. This comparison isn't for the faint of heart, as Palantir's stock has exhibited extreme volatility, with a beta of 1.6, meaning it moves 60% more than the broader market, in both directions. Over the last five years, its annualized standard deviation is a staggering 71%, and despite an 85% max drawdown, the stock recently approached a record high, underscoring its wild ride.
Brown warns potential investors that if intense market swings aren't their preference, Palantir might be a ride to skip. However, for those seeking thrills, the analysts delve into the company's story and charts, as Palantir has recently reappeared on their 'Best Stocks' list.
Sean Russo elaborates on the fundamentals, noting that Palantir was an original holding in their in-house momentum strategy, Porterhouse, launched in January. While it was sold off in April, it recently resurfaced on their top picks. Palantir's stock journey saw it hit a record $207.18 last November (presumably 2022), then plummet 48% to a June low near $107 (likely 2023), before nearly doubling to a new record close of $209.05 on October 9th (2023). As of a recent Wednesday close, it was up 13% year-to-date and 55% over the last three months.
Palantir specializes in building sophisticated software that empowers governments and large corporations to manage operations using their own data and AI models. Originating with U.S. defense and intelligence agencies, the company is rapidly expanding its commercial sector, which now represents its fastest-growing segment.
The company's business momentum has been robust, showing accelerated revenue growth for nine consecutive quarters. Recent figures indicated revenue growth reaching an impressive 93% in a quarter with $1.94 billion in revenue, with U.S. commercial revenue surging 149% and U.S. government revenue growing 90%. Net dollar retention hit 157%, indicating existing customers are spending 57% more year-over-year. Net income surpassed $1 billion in a single quarter for the first time.
Palantir's performance on the 'Rule of 40' (revenue growth plus profit margin) is exceptional, scoring 155 in a recent quarter using its 62% adjusted operating margin, marking its 12th consecutive quarter of improvement. This significantly outperforms giants like Microsoft (around 66) and CrowdStrike (around 45). The only larger companies ahead of PLTR in this metric were Micron (427), SK Hynix (333), and Samsung (182).
Management has consistently raised its full-year revenue guidance (for 2023, based on context) throughout the year, from $7.19 billion (61% growth) in February to $8.15 billion (82% growth) in August. Q3 guidance suggests 83% growth, with the company set to report on November 2nd. The substantial total remaining deal value of $13.1 billion, up 83%, further supports this outlook.
In September, Palantir deepened its partnership with Nvidia, integrating Nvidia's open models with its platform, allowing clients to run AI on proprietary data while retaining model ownership. Nvidia itself uses this setup for its supply chains.
Despite its impressive growth, Palantir is not a cheap stock. With a $483 billion market cap, it trades at 59 times this year's revenue guidance and approximately 78 times consensus 2027 earnings. However, the article highlights that while the stock price is back to its last November (2022) record, quarterly revenue has increased by 64% since then, making it a relatively 'cheaper' stock today at the same high.
Josh Brown concludes with risk management insights. Palantir's significant breakaway gap on August 4th, driven by its strong Q2 report, indicated strong institutional buying. The gap remains unfilled, and September pullbacks found strong buyer support at $166. The stock cleared its $195 ceiling in late September, then surpassed its November record on October 9th, reaching a high near $213 before a recent 4% drop to $201. With the 50-day moving average at $181 and the 200-day at $153, the stock's momentum, as measured by RSI, has reset after September's pullback, leaving room for another run.
For traders, the current battle line is $195. Brown suggests using $185 as a stop-loss, a 5% drop from current levels, which represents the floor of recent consolidation. For patient investors, anchoring to $166, where September lows occurred, is advised. A weekly close below $166 would break the pattern of higher lows. Ultimately, Brown's message is clear: whether you're strapping on your goggles for the ride or opting for the churro line, understand the risks.
