Palantir shares: AI gold or overhyped meme stock?

Palantir shares have jumped 35% this week. Will the proliferation of AI allow the company to evolve beyond its reputation as a meme stock?

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Palantir Technologies (NYSE: PLTR) shares have been making headlines this week, with a 35% surge in value. Investors are wondering whether the artificial intelligence (AI)-focused data analytics company is finally shedding its reputation as an overhyped meme stock.

Lore

Palantir was founded in 2003 by entrepreneur Peter Thiel, famous for being one of the first investors in Facebook/Meta. Thiel took the company name from one of his favourite books, The Lord of the Rings. In the novel, a ‘Palantir’ was a ‘seeing stone’ – a crystal ball that revealed events across the world. The name is apt: Palantir specialises in big data analytics and enterprise-scale intelligence.

Meme stock

After Palantir became public in late 2020, it quickly became one of the first instances of a ‘meme stock’. These are publicly traded equities that draw significant attention from retail investors on social media. Meme stocks are volatile: prices are often driven by inexperienced investors, media hype, and viral memes.

As was the case with Palantir. In November 2020, the stock rose by 225% in four weeks, driven by investment groups such as WallStreetBets (WSB). Since then, the price has declined, finding a bottom at ~$6 at the end of 2022.

Today, Palantir shares sit at ~$10, including Tuesday’s 23% single-day rise. This leap was caused by the release of strong earnings of $525m versus a $506m expectation. Reports were also provided for a suite of new AI tools.

AI gold

This focus on AI appears to have a strong product-market fit with Palantir’s client base, which consists of many federal agencies and military organisations.

For example, The Central Intelligence Agency (CIA) is a major client. Palantir’s software has been used to help track down terrorists, locate missing persons, and uncover financial fraud. It has also been used by regional law enforcement agencies to investigate crimes and by healthcare organisations to identify trends in disease outbreaks.

The recent proliferation of AI capabilities, such as GPT-4, has created an arms race in adoption. Palantir’s CEO, Alex Karp, recently described the demand for AI tools as “unprecedented”.

Seeing stone

However, all this investor excitement reveals one of the weaknesses of Palantir shares: the company’s roots as a meme stock. The moment a piece of news breaks, such as Tuesday, the price fluctuates dramatically. More than comparable technology companies, Palantir is highly susceptible to the whims of public opinion.

Personally, this over-exposure to retail investment groups like WSB creates too much volatility for me. Even at the time of writing this article, the price has moved ~10%. Palantir’s business fundamentals look attractive, but I cannot shake concerns that its shares look risky. If a comparative piece of negative press were released, it would create an equally severe price swing downwards.

Unlike the characters from The Lord of the Rings, I cannot access a magical seeing stone. Without a crystal ball, Palantir shares feel like too much of a gamble for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matt Tandy does not have positions in any of the shares mentioned. The Motley Fool UK has recommended Meta Platforms. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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