Opinion: This artificial intelligence (AI) stock is recession proof

Increased investor interest in all things artificial intelligence (AI) has contributed to massive returns for several related stocks and has contributed greatly to the current market performance. The investment spark sparked by AI progress has also likely contributed to an improvement in the overall economy.

The US 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 comes, a lot of stocks are likely to take a hit, including the technology sector and AI stocks that currently dominate the sector. Economic downturns tend to prompt investors to look for recession-proof stocks to hold while they wait for better times. Investors interested in AI stocks will have a difficult task finding recession-proof options. And yet, they exist.

The secret is finding recession-proof business which enjoy steady levels of activity even during recessions. One such business worth considering is Palantir Technologies (PLTR 0.46%).

Why Palantir?

Palantir began providing software and analytics services to the national security sector. Regardless of the broader economy, the need for national security and related services does not tend to change. The military and intelligence branches rely on analytical insights at all times, not just when things are going well.

As Palantir grew its operations, it began offering its AI analytics services to the commercial sector as well. On the surface, this might not seem recession-proof. After all, companies may fail or face struggles that may require them to cut back on non-essential services. Palantir’s saving grace is that what it offers is becoming essential for many companies that will first look to cut expenses elsewhere.

Palantir’s artificial intelligence platform (AIP), for example, can be used to help analyze a business’s operations to determine where it can save money. This generative AI platform can be used at any stage of the business cycle. However, this need is particularly acute when there is a recession and companies need information on how to be more efficient.

Palantir has hosted bootcamps for potential customers to better showcase how its software can be used. The productivity gains that companies are discovering are amazing. An insurance brokerage reported using it to automate policy review cases, while a convenience store chain applied it for inventory management and price optimization. Boot camps effectively demonstrate why AIP is indispensable regardless of economic conditions.

How is Palantir doing financially?

Between its various segments, Palantir generated more than $1.3 billion in revenue in the first six months of 2024, up 24% year over year.

Gross margins are huge in this business, reaching 81%. Operating expenses are flat (up just 6% in the first half of the year), allowing Palantir to report $240 million in net income attributable to shareholders (up from $45 million year-over-year last).

Palantir’s growth rate continues, with revenue estimated at $2.75 billion, representing 23% growth. That optimism has seen the stock roughly double in value over the past year. Given the productivity gains provided by AIP, one has to wonder if this rate of revenue growth will not increase over time.

Unfortunately, that optimism has also driven the stock’s price-to-sales (P/S) ratio to 32. In the short term, such a valuation makes Palantir shares vulnerable to a selloff if market sentiment or the company’s challenges spook them on shareholders. . However, over the long term, business strength 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. Of course, its stock isn’t invulnerable to an economic downturn, and shareholders could take a short-term hit if traders head into the broader market and hit high-value stocks. This suggests that investors may want to wait for a pullback or signs of accelerated growth before buying or buying more Palantir stock.

However, the recession-proof nature of Palantir likely means that demand for its services will remain steady or perhaps even increase in an economic downturn. On the commercial side of the business, AI has brought massive productivity gains and financial savings to its customers, 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 gains to the stock regardless of economic headwinds.