Last Year, Wall Street Said This AI Stock Was Overvalued. Now, Wall Street Expects It to Deliver Double-Digit Gains.

In recent years, several artificial intelligence (AI) stocks have delivered major gains and led the S&P 500 bull market higher. One of the most recognizable has been Nvidia, the world's No. 1 AI chip designer. But another company, for most of its history associated with government contracts, jumped into the limelight amid the AI boom. This player saw its government business continue to grow -- but it also developed a huge commercial business, resulting in major earnings gains.

And the stock took off, soaring more than 800% over the past three years. I'm talking about Palantir Technologies (NASDAQ: PLTR). Now, the only problem with this is that Palantir's valuation also climbed, and at its peak reached beyond 275x forward earnings estimates. Though future prospects looked bright, many analysts last year said Palantir was overvalued at these levels and potentially heading for declines.

Today, however, Wall Street is calling for a gain of 30% for Palantir stock over the coming 12 months. Is this former highflier heading for a new era of gains? Let's find out.

Image source: Getty Images.

Palantir's AIP

So let's take a look at the Palantir story so far. As mentioned, in its earlier years, Palantir generated the lion's share of its revenue from government contracts. The company develops software platforms that help customers aggregate, analyze, and make better use of their data. A turning point came when Palantir launched a platform -- simply called Artificial Intelligence Platform (AIP) -- bringing the power of large language models to the process. This was about three years ago, and since, commercial customer count and commercial revenue both have soared.

The reason for such success? Companies and organizations are eager to get in on AI and apply it to their problems -- AIP offers them an easy and rapid way to do this. Palantir holds AIP bootcamps to introduce potential customers to how they can use the software, and these events have translated into major contracts.

And all of this has helped Palantir's earnings to advance quarter after quarter. In the first quarter of this year, U.S. revenue surged more than 100% to about $1.2 billion. U.S. commercial revenue climbed in the triple digits, while government revenue advanced 84%. The company closed 206 deals of at least $1 million, showing growth here -- in the fourth quarter, it closed 180 deals of that size.

Revenue and profit

Importantly, Palantir's revenue is also translating into profitability, and it's achieved a solid balance of the two -- with a Rule of 40 score of 145%. Generally, a score of 40% is seen as good, so going this far above that means Palantir is hitting it out of the park.

This excellent performance isn't new, and last year, as Palantir's earnings climbed, Wall Street warned investors about the stock's valuation. Since then, price and valuation have come down.

PLTR PE Ratio (Forward) data by YCharts

Still, at 96x forward earnings estimates today, Palantir stock doesn't look particularly cheap. By comparison, AI leaders such as Nvidia or Alphabet trade at considerably cheaper levels.

PLTR PE Ratio (Forward) data by YCharts

Yet, today, the average Wall Street forecast calls for Palantir stock to climb about 30% over the coming 12 months. Is this top AI stock heading for a new chapter of gains? I think it's possible. As mentioned, the stock isn't cheap, but it has become more reasonably priced, which might encourage investors to take a second look.

And Palantir has proven its ability to continue generating revenue and profit growth, while growing important metrics like customer count and the value of contracts. Meanwhile, the company, like its AI peers, has delivered this message in recent quarters: Demand for AI continues to grow. Another plus is that we've reached a moment in the AI story in which companies are now eager to put the technology to use. Palantir allows them to easily do this. That should support earnings growth as the AI boom continues.

All of this means that, today, investors may be less concerned about Palantir's valuation and pay greater attention to its sustained growth -- and all of that could supercharge the performance of this AI stock in the months to come.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.