Palantir Technologies Inc. (PLTR, Financial) has gained in attention and favor among Wall Street investors due to the increasing fascination with artificial intelligence technologies like ChatGPT.
The software company, which develops data fusion platforms, has witnessed remarkable growth. This is reflected in its stock price surging by triple digits year to date. Palantir's expansion is fueled by its achievement of GAAP profitability, surpassing expectations by becoming profitable ahead of schedule.
Additionally, Palantir's strong government relationships position it well to capitalize on the growing AI market, particularly in the military sector. Despite previous concerns about slow growth and lack of profitability, the company's projected profitability in fiscal 2023 and its focus on leveraging AI's potential present opportunities for renewed revenue growth.
Palantir can open up additional revenue streams by enhancing core offerings
The company's growth has stemmed from its foundational government business, setting it apart from other software vendors. The data analytics company has forged robust partnerships with numerous government agencies, specifically national security, defense and law enforcement. While the government segment has historically contributed well over 50% of its revenue, the company has recently made a deliberate effort to accelerate growth in its commercial segment. During the first quarter, the government segment contributed 57.60% of Palantir's total revenue, marking a decrease from its share of 61.10% in the first quarter of 2021.
Investors have been attracted to Palantir due to its notable growth, particularly in the commercial segment. However, I believe the company's core government business could bolster its performance, driven by adopting artificial intelligence solutions, particularly in the military domain. Despite experiencing a growth rate slowdown to 18% in the previous quarter, the company has the potential for growth to regain momentum through wider adoption of AI applications by its clients, which could drive a reacceleration of growth.
The emergence of ChatGPT represents a game-changing development that is poised to disrupt numerous industries. This advancement aligns with the projected explosive growth of the AI market over the next decade, presenting a significant opportunity for Palantir. The company is well-positioned to integrate AI solutions into its software package, leveraging its core foundry business to help government institutions and corporations extract valuable insights from vast datasets. Artificial intelligence can facilitate faster and more cost-efficient decision-making processes through advanced data analysis.
The AI market is expected to undergo explosive growth in the coming decade, and Palantir is poised to tap into specific submarkets, such as military-oriented AI applications. The U.S. military, for instance, can benefit from Palantir's AIP in creating real-time battlefield representations and improving intelligence gathering, data collection and decision-making processes. Its technology also addresses the need for security in large language models, which interests the military and commercial sectors.
Risks
Palantir has encountered considerable scrutiny due to its declining revenue growth and absence of profitability. Nevertheless, its optimistic projection of achieving GAAP profitability this year highlights its efforts to address these concerns.
Nonetheless, there is still a significant risk associated with a potential growth slowdown, given the uncertain overall economic situation in the coming quarters. Notable figures in the investment realm are consistently expressing concern about a potential recession, and this prevailing apprehension weighs on the minds of many as we move forward.
Furthermore, Palantir has faced criticism for its collaboration in developing software for U.S. Immigration and Customs Enforcement, which has raised concerns regarding its involvement in facilitating deportations. In response, the company stated its software does not directly contribute to such actions. Some argue that such challenges are inherent when dealing with government contracts. However, the negative publicity is something Palantir and its shareholders would prefer to avoid, particularly in a world with growing emphasis on environmental, social and governance factors. Palantir strives to improve the situation by diversifying its contracts to include more commercial endeavors. Nonetheless, this transformation will require time and effort.
Valuation
In terms of valuation, Palantir has already experienced a revaluation of its shares following strong first-quarter earnings. However, there is further upside potential, especially as companies in a number of industries grapple with the impact of the AI revolution. Comparisons can be drawn to cloud-based software companies, suggesting that Palantir's current price-sales ratio of 16.45 is not significantly out of the ordinary.
By strategically moving into the cloud and AI markets, Palantir could potentially see a re-acceleration of its revenue growth.
Takeaway
In summary, Palantir's strong government relationships and AI capabilities through the AIP position it for growth in the expanding market. The company's valuation does not fully reflect the potential for accelerated top-line growth, particularly in the government sector.
By capitalizing on the rising demand for AI applications and integrating machine learning solutions, Palantir can drive future growth and solidify its position in the market.
