Palantir Overlooked: Potential for Big AI Gains Despite Volatility (NYSE:PLTR)

Tech CEOs Attend Sen. Schumer

Palantir CEO, Alex Karp (center) continues to disregard the short-term commotion to concentrate on long-term prosperity

Chip Somodevilla/Getty Images News

The shares of Palantir have risen by more than 40% this year (and by over 60% since our previous article in July) following an exceptional quarterly earnings report in February (where record revenue and profits were achieved, driven by demand for the company’s artificial intelligence (“AI”) platforms). CEO Alex Karp has been bragging since last summer that Palantir’s robust results (which persist) qualify it for addition in the S&P 500 (a positive outcome). However, S&P just issued its latest update for the index, and Palantir has been overlooked (Super Micro Computer (SMCI) apparently surpassed Palantir and received the approval instead). In this analysis, we examine Palantir’s business model (the company’s burgeoning AI Platform is the most significant change since our previous report), its market potential, financials, valuation, and risks, and then conclude with our viewpoint on investing.

Palantir Logo

Palantir

Overview

Palantir offers advanced software platforms for data analysis, utilizing sophisticated AI and machine learning methods. Its software seamlessly integrates organized data like spreadsheets and unstructured data like images and social media posts into a unified database, enabling visualization and analysis of all information. The company is further exploiting its AI expertise with AIP, an innovative platform that adds support for large language models and generative AI (Artificial Intelligence) to its current offerings.

Background

Palantir traces its roots back to 2003 when its creators (Peter Thiel, Alex Karp, and Stephen Cohen) envisioned an anti-terrorism platform, inspired by Thiel’s anti-fraud efforts at PayPal (PYPL) post-9/11. Initially operating discreetly, Palantir served the US intelligence community. However, the company gained popularity in 2010 when reports emerged that the US Army utilized Palantir software to locate high-value targets in Iraq.

Since then, Palantir has become widely recognized for its partnerships with government agencies globally. Furthermore, in recent years, the company has diversified into commercial sectors such as finance, healthcare, energy, and transportation. Today, its software is utilized in counterterrorism, fraud detection, disaster response, supply chain optimization, healthcare analytics, and more. As of December 2023, Palantir’s software has been adopted by over 60 industries worldwide, serving a total of 497 clients.

What are Palantir’s Software Platforms?

Palantir has developed three primary software platforms: Gotham, Foundry, and Apollo. Gotham and Foundry empower organizations to merge vast data volumes into a coherent asset reflecting their operations. Apollo, introduced commercially in 2021, is a cloud-agnostic tool, enabling customers to operate their software in almost any environment, ensuring uninterrupted critical system operations.

Palantir recently introduced its latest offering, the Artificial Intelligence Platform (AIP). AIP is customized for both commercial and government sectors, aiming to capitalize on recent advancements in AI by integrating Palantir’s existing software platforms with large language models (LLMs).

The company’s revenue sources are Palantir Cloud Subscriptions, On-Premises Software Subscriptions, and Professional Services.

  • Palantir Cloud Subscriptions: Clients subscribe to access Palantir’s software hosted in Palantir’s environment. These subscriptions include ongoing operation and maintenance (O&M) services.

  • On-Premises Software Subscriptions: Clients purchase software subscriptions granting them the right to utilize Palantir’s intellectual property in their own environment.

  • Professional Services: Palantir provides professional services to support clients’ utilization of the software. These services include user support, configuration, training, and ongoing data modeling support.

The company operates through two segments: Government and Commercial, constituting 53% and 47%, respectively, of the company’s total revenues in Q4 2023. Geographically, the majority of its revenue (61%) is derived from the US, with the remainder from international markets (39%), as depicted in the chart below.

PLTR Investor Presentation

Investor Presentation

Strong Durability of Platform coupled with Expanding Capabilities and Integrations

Palantir’s software platforms serve as the essential backbone for seamlessly integrating customers’ data and operations. Their vertically integrated design caters to users with diverse technical proficiencies, fostering effective collaboration within the platforms. From integrating new data sources to conducting daily workflows and making critical decisions, various stakeholders, including data engineers, analysts, data scientists, business users, and senior leaders, can leverage the platforms’ capabilities. Furthermore, each platform features user-facing applications tailored to specific industries and sectors, enhancing its durability and stickiness within the respective domains.

PLTR 10-K

Company 10-K

Palantir is emphasizing its AI expertise with Artificial Intelligence Platform, a platform integrating large language models and generative AI into its existing platforms. AIP targets customers in both commercial and government sectors, offering them the opportunity to harness recent AI advancements. It uniquely enables users to link large language models with their data and operations, aiding decision-making. Since its launch in May last year, AIP has gained significant traction, particularly in the commercial sector, driving strong growth for Palantir. The company has been hosting “bootcamps” to demonstrate AIP’s capabilities to commercial clients, with these training sessions proving highly effective in converting customers.

PLTR Investor Presentation

Investor Presentation

Large, Growing Market Opportunity with Significant Secular Tailwinds

The global big data analytics market is projected to reach $745B by 2030, with a robust CAGR of 13.5% from 2023 to 2030. This growth is fueled by the increased demand for data-driven decision-making. As the volume of data surges from interconnected devices and social media, businesses face a pressing need to swiftly process and analyze this data to extract actionable insights. According to the 2024 Data and AI Leadership Executive Survey conducted by Wavestone, the percentage of organizations utilizing data for business innovation has shown substantial improvement, rising from 59.5% in 2019 to 77.6% in 2024.

AI artificial intelligence top stocks

Fortune Business Insights, Wavestone

(source: Fortune Business Insights, Wavestone – 2024 Data and AI Leadership Executive Survey)

With its expertise in seamlessly integrating, interpreting, and extracting value from data, Palantir is well-positioned to capitalize on the enduring trends of mobility, data expansion, and cloud migration. Additionally, as a preferred vendor for governments, the company is poised to benefit from the ongoing increase in the IT allocation within global military and defense budgets.

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Statista

Source: Statista, Statista

Expanding Customer Base and Increasing Revenue Contribution from High-Value Customers Provides Revenue Stability

In Q4 2023, Palantir acquired 44 new clients, totaling 497 by the end of FY 2023, marking a 35% YoY increase. This growth was predominantly driven by the commercial segment, which experienced a 44% YoY rise, reaching 375 clients. The company is actively implementing numerous real-world use cases with AIP, further boosting its momentum and contributing to both new customer acquisitions and expansions with existing clients.

AI artificial intelligence top stocks Palantir PLTR

Investor Presentation

Revenue from top clients also experienced a notable increase, with Q4 TTM revenue from the top 20 clients climbing by 11% YoY to $55 M per client. Palantir closed 103 deals of at least $1M, ~2x from a year ago. The company’s net dollar retention rate was at 108%, underscoring its ability to successfully upsell to existing customers while maintaining high levels of customer satisfaction.

AI artificial intelligence top stocks Palantir PLTR $PLTR

Investor Presentation

Promising Revenue Growth and Improving Profitability

In Q4 2023, total revenue increased by 20% YoY to $608M, driven by the US commercial business, which surged 70% year over year. This impressive performance was largely fueled by the positive momentum in AIP. In Q4 2023, Palantir reported 56% YoY growth in total billings, reaching $605M, demonstrating strong product demand and successful contract acquisitions.

The company generated $2.23B in revenue in FY 2023, an increase of 17% over the previous year. Full-year commercial revenue grew by 20% YoY, surpassing the $1B mark for the first time. For FY 2024, Palantir expects total revenue of about $2.7B, representing a 21% YoY growth.

AI artificial intelligence top stocks Palantir $PLTR PLTR

Company Filings

Source: Company Filings

“The demand for large language models from commercial institutions in the United States continues to be unrelenting. Every part of our organization is focused on the rollout of our Artificial Intelligence Platform (AIP), which has gone from a prototype to a product in months. And our momentum with AIP is now significantly contributing to new revenue and new customers.”Alexander C. Karp, Chief Executive Officer & Co-Founder

On the profitability front, the company reported healthy gross and operating margins, driven by continued improvement in unit economics. Adjusted gross margin was 84% in Q4 2023, up 200 basis points compared to last year. Adjusted operating margin continued to expand, reaching 34%. For FY 2023, the adjusted gross margin and operating margin were reported at 82% and 28%, respectively. Palantir’s strong bottom-line performance in 2023 allows for increased investment in research and development. The management team expects expenses to rise in Q1 2024, but the focus remains on managing expense growth below revenue growth for the full year, aligning with goals of sustained profitability.

Palantir PLTR $PLTR AI artificial intelligence top stocks

Company Filings

Healthy Balance Sheet and Cash Flow Generation

Palantir ended Q4 2023 with $3.7B in cash, cash equivalents, and marketable securities and no debt on its balance sheet. Cash Flow from Operations (CFO) and Adjusted Free Cash Flow (FCF) saw notable increases in Q4 2023. CFO rose to $301M from $79M, while FCF climbed to $305M from $76M compared to the previous year. The company’s robust balance sheet, along with its strong cash flow generation, demonstrates financial stability and ensures that it has ample liquidity to fulfill its short-term obligations and pursue growth initiatives.

PLTR $PLTR Palantir AI artificial intelligence top stocks

Company Filings

Valuation

Palantir’s stock has encountered a notable surge, escalating over 200% in the past year. Better-than-expected revenue along with improving profitability are propelling substantial gains for the AI stock. Investor confidence is rising, particularly towards the company’s Artificial Intelligence Platform (AIP), which is driving robust growth in the commercial segment. However, the stock is still nearly 30% below its all-time high reached in 2021.

In terms of valuation, PLTR currently trades at a price-to

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