Despite its stock being down 65% since the year started, Palantir Technologies (PLTR, Financial) continues to soldier on. The number of clients for its domestic commercial business grew 124% year over year from 59 in the third quarter of 2021 to 132 in the most recent quarter, leading to a 53% increase in revenue for that segment. The company has also recently received recognition as the top artificial intelligence software platform worldwide according to IDC. It is also considered the leader in artificial intelligence and machine learning platforms according to Forrester. Additionally, the company has reported positive adjusted free cash flows in each of its last eight earnings reports.
Here's why I believe Palantir is a top long-term growth play with very strong and durable competitive advantages.
An easy to undertand business model
Palantir is a software company that offers solutions for integrating and making sense of data through artificial intelligence and manual operations - products that have a wide range of applications and are used by a variety of industries and government agencies.
It has two main offerings: Gotham, which is primarily used by government organizations in the defense and intelligence sectors, and Foundry, which is geared toward commercial enterprises. Customers can either subscribe to Palantir Cloud, which is hosted by the company, or purchase on-premise options that can be deployed on their own hardware or in other environments. Both versions are recognized on a ratable basis over the length of the contract, which is usually five years. Palantir also provides operational, maintenance and professional services to its customers.
Palantir Gotham is a platform for integrating, visualizing and analyzing data from a variety of sources. It is primarily used by government agencies and financial institutions to detect and prevent fraud, money laundering and other types of criminal activity. Palantir Foundry is a platform for building custom applications that allow organizations to integrate, manage and analyze their data. It is used by a variety of industries, including health care, finance and manufacturing.
The company has faced public criticism for its work with government agencies, particularly its contracts with immigration enforcement agencies, due to what may be considered huge violations of privacy but has not yet been regulated by the government. The company has also been scrutinized for its lack of transparency and its involvement in the development of the United States drone program. Despite all the human rights controversies (or perhaps because of them), Palantir has continued to grow and has attracted a number of high-profile clients, including the FBI, the CIA and the Department of Defense.
Palantir's other offering, Foundry, is less controversial, and the company aims to grow this segment to draw attention away from its government services. This is a software designed for large-scale data operations and is primarily sold to commercial organizations. The company's goal is to become the "data operating system" for businesses and industries across a range of sectors. In the past, companies often needed to engage in consulting and in-house development efforts in order to integrate data holistically. However, Palantir's commercial offering aims to revolutionize this process. For instance, Palantir has made progress in becoming a standard data platform for the airline industry by integrating various components of the industry and is now looking to replicate this success in other sectors.
A scalable business model, with hands-on guidance
What I find interesting about the company's business model is that Palantir sends its own engineers to work in the field so they can gain firsthand knowledge of customer and industry challenges and make deliverable more useful to clients. This approach helps Palantir increase deployment efficiency while also improving its products at scale. The company's future growth will be driven by both its expanding government customer base and new commercial ventures as it shifts towards a software-as-a-service (SaaS) model.
To that end, Palantir has recently signed a number of new commercial contracts, including with Beckett Collectibles and Hertz (HTZ, Financial). In addition, the company has secured additional modernization work with the FDA and renewed its partnership with the CDC. More importantly, every new contract or partnership it signs leads to long-term revenue and creates a backlog of orders, which means that positive news does not usually show up immediately in the company's financials.
Palantir has pretty strong competitive advantages. Its software and services have become mission-critical for the U.S. government and enterprises, and that means high switching costs. Data analysis is going to become the number one priority of every organization, and artificial intelligence will be the most integral part of the solution. Thus, despite the current lack of profitability, Palantir could build upon its economic moat to enact robust operating leverage and achieve above average returns in the longer run, which brings me back to the present.
Despite a strong valuation, Palantir is a bargain
Palantir believes it can grow sales at close to 30% a year until the end of the decade. Alex Karp, the company’s CEO, could revise this if the next couple of quarters do not meet this expectation, but let’s say it comes into fruition. In that case, $1.8 billion in sales will balloon to nearly $12 billion by 2030. Surely by then, the company will seek to turn and remain profitable. If not, the stock could still trade between five and 10 times sales just based on the growth rate. That means the market capitalization could be between $60 billion to $120 billion by 2030.
With Palantir’s stock down more than 25% from its IPO price and most analysts seeing unspectacular performance for the coming year, I believe it could be a good time for investors interested in the stock to really dig into their research. Palantir can run on a loss for years with its current cash burn rate, and no other company appears even close to being able to take away its economic moat, which is getting larger. Maybe it will take a while for the market to realize the stock's potential, and it may be a bumpy ride. Yet, a bumpy ride to five or 10 times growth is always better than a smooth two times growth.
