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Why Palantir Stock Popped on Thursday
Key Points
Goldman Sachs analyst Gabriela Borges upgraded Palantir stock to "buy" with a $230 price target this morning.
The AI market is shifting towards sovereign AI systems and "bespoke applications," providing more room for Palantir to grow.
Palantir stock trades for more than 160 times earnings but closer to 136 times free cash flow.
Defense stock and artificial intelligence company Palantir Technologies (NASDAQ:PLTR) defied today's market downturn to rise 3% through 9:50 a.m. ET Thursday morning.
You can thank Goldman Sachs for that.
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Goldman Sachs loves Palantir stock
Goldman Sachs analyst Gabriela Borges upgraded Palantir stock to "buy" with a $230 price target, as StreetInsider.com reports today. The rapidly rising growth stock, says Borges, did $6.2 billion in revenue over the last 12 months, has already reached an annual recurring revenue (ARR) of $8 billion, and is growing revenue at 100% per year.
Investors are valuing Palantir stock at 80 times trailing sales -- and twice that for price-to-earnings. This gives the stock a PEG ratio of about 1.6x, which is challenging, but not entirely indefensible, assuming Palantir can maintain its growth rate.
What's next for Palantir stock
But can Palantir keep growing sales at 100% per year? Borges argues it can, because the artificial intelligence market is approaching a new "step function" in which sovereign AI systems and "bespoke applications" (both built and owned entirely by their builders, rather than rented from other companies) provide a new market to grow in. Borges sees Palantir as a leading force in this market as it deploys "artificial intelligence forward-deployed engineers," or AI FDEs -- software agents built by Palantir -- to help build these systems.
The analyst further points out that Palantir stock is cheaper on a price-to-free cash flow basis than on P/E alone -- which is true. Free cash flow at the company runs about 10% ahead of reported net income. On an enterprise value-to-free cash flow-to-growth basis, Palantir scores closer to a 1.4x ratio.
Palantir still isn't a cheap stock, but Goldman's right: It's at least a little cheaper than it looks.
Rich Smith 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.