The Market Is Punishing This AI Stock. History Says That's a Mistake.
Key Points
This stock has declined about 20% over the past few months.
The company continues to report strong earnings growth and high demand.
Artificial intelligence (AI) stocks have struggled in recent months, upset by a variety of elements. Investors have worried about the fast pace of AI spending, any negative economic data, and geopolitical turmoil, such as the war in Iran. These concerns have weighed on investors' appetite for growth stocks -- the stocks most vulnerable to such problems.
Against this backdrop, one stock in particular has seemed to drop out of favor. It's a company that's delivered explosive earnings growth, has seen its stock soar in the quadruple digits in recent years, and is well positioned for more growth.
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The market is punishing this AI stock... but history says that's a mistake.
Image source: Getty Images.
Game-changing technology
The stock I'm referring to is Palantir Technologies (NASDAQ: PLTR), a company that sells AI-driven software to governments and commercial customers. Palantir's software helps them aggregate and analyze their data, then use the findings to make better decisions, develop new processes, or even innovate. It's been a game changer for many, and word has gotten around -- that's spurred soaring demand that's continued quarter after quarter.
And the result has been earnings growth, with revenue and profit on the rise in both the commercial and government businesses. Palantir is particularly popular these days because it helps customers almost effortlessly apply AI to their situations and generate impressive results.
Now, let's consider Palantir's stock performance. The stock has dropped about 20% over the past three months. The headwinds I mentioned above surely have held it back, but another element may also be playing a significant role, and that's valuation. Though Palantir's has come down, it remains at high levels.
A look at history
A look at history shows us this isn't the first time that Palantir's valuation has fluctuated. In fact, in the past, every time it's dipped, the stock has gone on to gain -- and many times, gains have been significant.
PLTR PE Ratio (Forward) data by YCharts
Regarding valuation, it's important to note that yes, Palantir's valuation today is high, but this measure only considers earnings estimates a year from now -- it doesn't consider earnings potential years down the road. So, while the stock surely isn't the best bet for investors looking for value stocks, it could be an excellent buy for investors focused on growth.
Today, the market is punishing Palantir, and this may make you hesitate to buy. But history shows us that this player has been through similar periods and each time has gone on to advance. All of this means that avoiding Palantir might be a mistake if you're a growth investor -- instead, now may be the perfect time to get in on this AI winner.
Should you buy stock in Palantir Technologies right now?
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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.
