Cathie Wood over at Ark Invest has been making moves in recent months amid the barrage of volatility slamming the tech sector. Undoubtedly, semiconductors have continued to be the leadership group while the Magnificent Seven have pulled the brakes a bit.
With the flagship Ark Innovation ETF (ARKK) trailing the markets, up just over 3%, while the S&P 500 has gained close to 10%, questions linger as to what Wood will do as the AI revolution continues to move ahead at full speed, while some investors worry a bit about valuations and the potential open door for interest rate increases. Indeed, it can be tricky to tell what wins and loses when a disruptive technology heads into overdrive.
Arguably, AI is the most disruptive technology of all time, and the pain in software stocks (the so-called SaaS-pocalypse) offers just a hint of what could happen to investors if they’re caught on the wrong side of the profound technological shift that AI has rung in.
Not all software is created equally. That much is clear, with shares of cybersecurity firms and other innovations actually gaining ground in these early days of the AI boom after an initial scare earlier in the year.
Of course, not every punished software player is destined to get back on their feet. The big question for dip-buyers, though, is which names are still down but don’t deserve to be, given their role in the AI revolution?
Palantir is firing on all cylinders, but its stock isn’t
A name like Palantir (NASDAQ:PLTR | PLTR Price Prediction) has fallen heavily out of favor this year, now off more than 30% year to date.
Undoubtedly, it’s been one of the biggest AI software winners out there. And while this latest bear market plunge is not unexpected after the meteoric rise that followed (arguably, it’s a healthy plunge that’ll allow growth to catch up with the hefty multiple), I do think that Palantir isn’t one of the software plays that will be so easily disrupted by a frontier AI lab such as Anthropic. The latest quarterly result from Palantir was nothing short of a blowout.
But there are doubters, including Michael Burry of The Big Short fame, who think that Anthropic could devour Palantir’s lunch. Indeed, it’s this kind of thinking that probably caused software stocks to fall off such a steep cliff a few months ago. While time will tell how many more industries Anthropic and peers at the frontier will disrupt, I do think that Palantir has a wider economic moat than most would think.
Palantir isn’t cheap, but growth is catching up
Ontology and platforms that harness the full power of AI models might be every bit as important as the power of the AI model behind them. Arguably, the model could be commoditized, whereas how the model is used could be the major source of a moat as firms look to monetize the technology. With the rise of agentic AI and workflow automation, I think Palantir is in a great spot to keep up its mouth-watering, high-margin growth.
While the stock is cheaper than it was months ago, the shares remain far from cheap at more than 78.0 times forward price-to-earnings (P/E) and 56.0 times price-to-sales (P/S). Given that explosive quarter of growth (85% was a grand slam of a home run), maybe Palantir could grow into its multiple sooner than expected?
Time will tell. Either way, I think Burry is smart to step back (at least halfway with his short position) while Wood steps in with a big bet for some of her ETFs. As Palantir’s bootcamps look to accelerate adoption, I do think that some more surprising quarters could be in the cards. As to whether they’ll move the needle higher, though, remains the big question. There’s still quite a bit baked into the current multiple, after all.
The bottom line
In any case, I think Wood is right to give CEO Alex Karp and his firm a vote of confidence. They’re winning in a big way while much of the software is on the ropes. And I have a feeling that Palantir might be a structural winner from AI with a clear growth runway.
With Burry covering half of his short position while innovation investor Cathie Wood steps in, perhaps it’s time to get a bit more constructive on the name that’s already served its time, now down around 44% from all-time highs.
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