The increased investor interest in all things related to artificial intelligence (AI) helped drive massive returns for several associated stocks and contributed greatly to the performance of the current bull market. The investment spark that AI advancement set off also likely contributed to an improvement in the overall economy.
The U.S. economy is showing signs of strength as well as some signs of weakness these days, leading some to wonder if a recession is possible. If a recession does come, plenty of stocks are likely to take a hit, including the tech sector and the AI stocks that are currently dominating the sector. Economic downturns tend to send investors scrambling to find recession-proof stocks they can hold as they wait for better times. Investors interested in AI stocks will have a difficult task finding recession-proof options. And yet, they do exist.
The secret is finding recession-proof businesses that benefit from steady activity levels even during recessions. One such business worth considering is Palantir Technologies (NYSE: PLTR).
Why Palantir?
Palantir got its start offering software and analytical services to the national security sector. Regardless of the broader economy, the need for national security and related services doesn’t tend to change. The military and the intelligence branches rely on analytical insights at all times, not just when things are going well.
As Palantir grew its operations, it began to offer its AI-related analytics services to the commercial sector as well. On the surface, this might not appear recession-proof. After all, companies can fail or face struggles that might require them to cut non-essential services. Palantir’s saving grace is that what it offers is becoming essential for many businesses who will look to cut expenses elsewhere first.
Palantir’s Artificial Intelligence Platform (AIP), for instance, can be used to help analyze a business’s operations to determine where it can save money. This generative AI platform can arguably be put to use at any stage of the business cycle. However, that need is especially acute when a recession occurs and companies need its insights on how to be more efficient.
Palantir has been hosting boot camps for prospective clients to better showcase how its software can be put to use. The productivity gains companies are discovering are eye-popping. One insurance brokerage reported using it to automate policy review cases, while a convenience store chain applied it to inventory management and pricing optimization. The boot camps are effectively demonstrating why AIP is indispensable regardless of economic conditions.
How Palantir fares financially
Between its various segments, Palantir generated more than $1.3 billion in revenue during the first six months of 2024, up 24% year over year.
Gross margins are enormous in this business, coming in at 81%. Operating expenses are leveling off (up by only 6% in the first half of the year), allowing Palantir to report $240 million in net income attributable to shareholders (up from $45 million over the same time frame last year).
Palantir’s growth rate continues apace, with forecasted revenue of $2.75 billion representing a 23% increase. That optimism has led to the stock approximately doubling in value over the last year. Considering the productivity gains offered by AIP, one has to wonder whether that revenue growth rate will not rise over time.
Unfortunately, that optimism also took the price-to-sales (P/S) ratio on the stock to 32. In the near term, such a valuation admittedly makes Palantir stock vulnerable to a sell-off should market sentiment or company challenges spook shareholders. However, in the long run, the strength of the business should support the stock regardless of the state of the economy.
Palantir as a recession-proof AI stock
Palantir is one of the few AI stocks that will likely be minimally affected by economic cycles. Admittedly, its stock is not invulnerable to an economic downturn, and shareholders could take a short-term hit if traders turn on the market generally and hit highly valued stocks. That suggests investors might want to wait for a pullback or signs of accelerated growth before buying in or buying more Palantir shares.
However, Palantir’s recession-proof nature likely means demand for its services will remain constant or perhaps even increase in an economic downturn. Regarding the commercial side of the business, AI has brought its clients massive productivity gains and financial savings, making its services and capabilities attractive regardless of the state of the economy.
Even though the stock’s near-term outlook is more uncertain, Palantir’s growth as a business should bring long-term increases in the stock regardless of economic headwinds.
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Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Opinion: This Artificial Intelligence (AI) Stock Is Recession Proof was originally published by The Motley Fool
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