The folks who sell trading tools or run “chat rooms” for day traders aren’t usually at all interested in the specifics of a business — they don’t often care what the free cash flow might be, or what the story is behind the founder of the company or whether their product is better than the competition, or even whether the company is reporting good growth in revenue or earnings… they care whether the stock is likely to move a few percent in a given day or week, so they can shave off their profit and move on to the next thing.

Not that there’s anything wrong with that. Some folks are active traders who buy and sell rapidly around catalyst events, like earnings reports, or use charting tools to get in and out of positions in a matter of days or weeks (or hours, even). That’s a harder business than fundamental investing, and I’m a bit prejudiced against the voodoo of some of the charting that short-term traders rely on, but it’s really just a different way to trade human emotion — you try to parse the expected changes in the emotions of other traders (“the market”) by interpreting charts or monitoring the past history of a stock around particular dates.

I’m sure it works sometimes, and I’m sure some people are better at it than others — I worry that it attracts new investors with gambling problems who don’t know what they’re doing, or don’t keep a good handle on the risks they’re taking, but people can make their own decisions on that stuff. You’re not a teenager (probably), and I’m not your dad, and I’m not here to tell you what kind of investor or trader you should be.

Got off track a little there. My point was that although I mostly do individual company research, and I’m usually interested in the newsletters who are recommending specific investments because of some insight about a particular business, the “system” trader and “trading tools” companies also sell their subscriptions by teasing specific companies… I guess they see that it works for their “company research” newsletter cousins, so even though it’s not at all in their wheelhouse, they promote their own “special reports” with fundamental stock research in order to sell access to their trading room, or their day-trading subscriptions, or whatever other tools they’re peddling.

That’s what Ross Givens has been doing over the past couple years, for example, using promos about his “AI Wonder Stock” (Soundhound (SOUN)) and “#1 Tech Stock of the Decade” (Roblox (RBLX)) to sell entry-level access to his “Live Action War Room” trading discussions. I guess these kinds of promos work well, because they certainly keep filling my inbox.

So… long-winded introduction over, a new teaser along those lines what caught my eye today, from a publisher I’ve never written about before.

A company called StockEarnings.com aims to sell trading systems, which seem to try to harvest 5-10% profits by trading stocks or options around earnings dates, and to draw in new subscribers they’re offering a tease that’s called, surprise surprise!, “Top AI Stock for 2024.”

The ad comes form Hiral Ghelani, who is the founder of StockEarnings.com, and that site offers up some free screening tools for predicting stock price moves around earnings dates, too… but otherwise I know nothing else about them. They’ve been around for about five years.

But here’s what Ghelani teases in their email, as they try to use the “Top AI Stock” promo to build up their email list and sell some subscriptions…

“Imagine you own a small company.

“Now, further imagine that you had AI software that could create a digital twin of your business model.

“And with that software, you could grow your virtual business alongside your actual business…

“While using everything you learn to improve both!”

And he says that AI is already making this possible, so in case you’re a small business person who has time to both run your business and test a simulation of your business, I guess you can jump right in. But what investment is he talking about?

Here’s how he hints at it…

“It’s all thanks to a disruptive AI company that’s in prime position to explode revenues.

“(Recently it announced its first profitable quarter and I predict many more in the years ahead.)

“Make no mistake – this is no unproven little startup. Already it boasts 375 corporate clients.”

It looks like they’re trying to “give away” this report in exchange for your email address, so you might not have to sign up for their paid subscriptions, but I would assume that the “report” is mostly just charts and data about the stock’s reaction to past earnings reports. So if you were just curious about what the “#1 AI Stock for 2024” might be, we can at least confirm that from those clues it has to be Palantir (PLTR).

And yes, that’s a stock you’ve almost certainly heard of, and one that has been an AI darling since NVIDIA first shocked us all with the impact of AI demand on their earnings back in May of 2023 and got this party going (yes, the AI fascination really started with the launch of ChatGPT in late 2022… but I’d say it was NVIDIA’s crazy earnings report just under a year ago that catapulted AI fascination into a full stock market mania).

Palantir has certainly been picked as an AI favorite before — Dylan Jovine has been all over it for more than a year, and we’ve certainly seen lots of other relatively high profile newsletter pundits pitch the shares as well, from Luke Lango to Shah Gilani, though I haven’t written about it all that often. It was an extremely popular stock when it first went public in 2020, and was one of the most popular and mysterious private companies in the years before that as we all waited for that PLTR IPO, largely because they were primarily known for selling data insights to the intelligence community… but it did take two things to really reset investor expectations after that initial post-IPO surge in 2021 and collapse in 2022: They started to get more non-government customers, which encouraged investors about the growth potential, and they started telling the “AI” part of their story more vociferously.

And yes they did report their most profitable quarter in February… though it’s not fair to say it was their “first profitable quarter” — that came roughly a year ago (they were profitable on an adjusted basis for longer than that, but just became GAAP profitable in the fourth quarter of 2022). 2023 was the first full year of GAAP profitability, for whatever that’s worth. And they did report having 375 corporate customers in their last quarter.

This is a baffling company, frankly — my short description is that they work with hundreds of government agencies and (mostly large) companies to provide software that mines, interprets and analyzes data to provide insights for decisionmaking. A lot of that is under the umbrella of AIP, their Artificial Intelligence Platform, but beyond that basis knowledge, well, I’d urge you to dance around in their website for a while to try to build some understanding, but you’re pretty much on your own. They do have a lot of case studies that provide examples of customer projects, and they clearly have a plan for turning what was a mysterious “big data” company that mostly worked with the government into the leading enterprise scale “AI” company. It seems like it’s working pretty well, going just by their ongoing success in onboarding large new customers.

How does the valuation look? Well, as you’d expect for a market that’s embracing AI as the world’s growth engine, it’s a bit challenging. Palantir is a $54 billion company these days, so it’s back to being as large as it was during the peak of 2021’s crazy market… but the good news is that the company has grown nicely during that time, roughly doubling revenues in the last three years, so it now trades at “only” 25X sales (it peaked well over 40X in early 2021). If analysts are on target with their estimates, then Palantir is going to post about 33 cents in adjusted earnings this year (14 cents in GAAP earnings — they still have a LOT of stock-based compensation, which they leave out of their adjusted earnings)… so by that measure, they are currently valued at about 74X forward adjusted earnings.

That means this is at least a little bit faith-based… you need to have some faith that growth will be strong in the future, and that eventually the scale of their larger cohort of corporate customers will mean that their margins improve at some point. Part of the challenge is that Palantir has widely been seen by analysts as a consulting company, partly because of their heavy reliance on government work, and consulting is a much lower-margin business than software (since a consultant can only work on one thing at a time, while essentially the same software can be used by 100 customers as easily as by one). So I think the idea behind picking the stock, for many investors, is that Palantir is going to grow into more of a software company, eventually earning higher margins and posting stronger cash flow and earnings.

Could be. The stickiness of their customers is impressive, their defense and intelligence customers around the world provide a pretty steady foundation while the growth mostly comes from corporate work, and they have plenty of cash on the books (so they shouldn’t be particularly fragile). It remains a mysterious company, and CEO Andrew Karp is a polarizing figure for some investors, and focuses a lot on the defense customers (he has been to Israel to help with their war against Hamas, as well as to Ukraine to provide tools for their defense against Russia), but he also does a great job of selling the story — I’d recommend starting with his latest shareholder letter if you want to get a sense of what’s happening at Palantir right now. They expect to have close to a billion dollars of adjusted free cash flow this year, so things are going well, I’d say the primary risk is that when you’re paying a high valuation, you have to expect extreme volatility if the news ever drifts even slightly negative — at more than 25X sales, 50X expected free cash flow, and 75X adjusted earnings there’s not a lot of room for disappointment.

But the same could be said of many popular growth stocks right now, I certainly own some companies that I think are too expensive to buy right now (The Trade Desk, Intuitive Surgical, NVIDIA, etc.), and Palantir is an interesting story, and you can at least imagine future growth which could let them easily grow into their current valuation. I came close to buying this stock a little over a year ago, when it got down to a pretty obviously reasonable valuation, but didn’t end up doing so, which means I’m probably “anchored” a bit too much on my decision not to buy when it was below 10X sales… but you don’t have to live with my psychological barriers, since I’m sure you’ve got your own to deal with, so you can just start from scratch: Do you think Palantir will be a leader in enterprise AI? Expect the strong growth in corporate customers to continue to grow cash flow? If you’re confident about those things, then the only thing that an elevated valuation means is that you’ll have to be patient, and you’ll have to take the risk that there could be big drops in the share price when the narrative shifts.

We’ve looked at well over 50 AI stocks that are being touted by various newsletters, and most of the popular stories among that group are trading on the same kinds of sentiment about future growth for artificial intelligence projects, and about almost endless corporate spending on AI initiatives. That could keep lifting the group, for sure, and there’s no end in sight for those narratives at the moment… just keep in mind that these story stocks also tend to trade together. If your portfolio gets too focused on one “story,” it might be a lot more volatile than you expect.

If you want to own a bunch of “AI” stocks, make sure you have a plan for what you’ll do if the narrative changes — sell if they hit a stop loss? Hold on if certain criteria are met? Buy more if you think the company continues to be well-positioned? Your plan will be personal, but have a plan — otherwise the most likely outcome, for almost all human beings in almost all market manias, is “buy high and sell low.”

I’m sure there are a bunch of Palantir shareholders (and probably detractors) out there in the great Gumshoe readership… so if you’ve got a reason why we should or shouldn’t put money into PLTR, please chime in with a comment below. Thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of The Trade Desk, Intuitive Surgical and NVIDIA. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.