The bear’s argument against Palantir falls apart and here’s why.
One of the most polarizing and perhaps misunderstood companies on Wall Street is… Palantir Technologies (belter -0.53%). For years, the company was privately owned and funded by prominent Silicon Valley venture capitalists — most notably Peter Thiel.
Unlike other startups, Palantir has remained somewhat low-profile during its time as a private company. Very little is known about its operations outside of its relations with the United States government.
When Palantir entered public exchanges in late 2020, a schism arose almost immediately between retail investors and institutional funds. The retail community loved it, thanks in large part to its CEO, Alex Karp.
But Wall Street had a different opinion. Many research analysts saw the company as nothing more than a government contractor or glorified consulting firm, masquerading as an enterprise software developer.
After a brutal sell-off in 2022, the stock rebounded sharply last year, rising 167%. Since reporting fourth-quarter and full-year 2023 earnings earlier this week, Palantir has been on another tear.
Let’s dive into the earnings report and evaluate how the company debunks the bear argument on Wall Street.
Isn’t Palantir just a government contractor?
Palantir works closely with the US government and its Western allies. Given the company’s reliance on large public sector deals, many on Wall Street dubbed the company a contractor-like… RTX Company or Lockheed Martin.
There’s a lot of money to be made in government contracting, but these deals tend to be lumpy and much less predictable than other traditional technology companies. Management spoke at length about the company’s cutting-edge data analytics capabilities rooted in artificial intelligence (AI); It seems that Wall Street was not convinced.
In fact, The Bear Cave’s Edwin Dorsey went so far as to declare Palantir an “AI scam.”
Is the struggle real or is it?
Given the above sentiment, it’s clear that Wall Street had doubts about Palantir’s ability to break into the private sector. The table below shows revenue trends between the government and commercial sectors over the past few years.
|Annual growth of government revenues
|Annual growth of business revenue
The table is a bit difficult to interpret. On the surface, it may appear that Palantir is moving in the wrong direction, given its slow growth. Keep in mind that the past two years have been particularly difficult for software companies, as companies of all sizes have reined in spending due to macroeconomic challenges.
The more important theme is that Palantir’s commercial sector business is accelerating overall and is no longer playing second fiddle to the old government sector. For the 12-month period ending December 31, the number of total customers was up 35% year-on-year – but the number of commercial customers was up 44%. This is important to understand.
Basically, Palantir has done a great job of acquiring new customers, especially outside of government agencies. However, the growth rates shown above confirm that this new business has not yet been fully monetized. For this reason, investors should be encouraged about the company’s future and the potential for accelerated growth.
The bears must return to their caves
Palantir has been able to make rapid progress in the private sector thanks to an innovative strategy to attract potential customers. Last year, the company released its fourth major product, the Artificial Intelligence Platform (AIP). In an effort to market the product amid intense competition, it began hosting immersive seminars called bootcamps, where potential customers could test the company’s products and identify the use of artificial intelligence.
Management says it hosted more than 500 bootcamps in 2023, compared to 92 pilot programs in 2022. This increase underscores the interest in AI-powered products, and the company’s customer growth shown above validates management’s claim that “momentum At AIP he drives both.” New customer conversions and existing customer expansions.”
Palantir’s continued growth in the commercial sector weakens the argument that it is merely a glorified government contractor. Moreover, the overwhelming success of AIP and the demand it generates proves that the company has developed impressive analytical software products.
Although I suspect bears like William Blair analyst Louie DiPalma won’t change his stance anytime soon, the stock’s recent price action may indicate that the company is becoming more widely accepted as an emerging AI leader among its larger peers. Technology field.
Some might counter that the company’s government business is slowing down, but a trend like this should be expected given the lumpy nature of public sector deals. Moreover, this argument does not hold much merit given that some on Wall Street initially resented Palantir for its over-reliance on government contracts.
The company is building a strong business outside of its legacy government practices, and is using innovative AI-driven solutions to achieve this new phase of growth. Simply put, Wall Street can’t have it both ways.
Despite the stock’s rise, it is still trading about 40% off its all-time highs. For investors looking to gain exposure to high-growth AI businesses, Palantir represents a unique opportunity that goes beyond big tech. Now may be an interesting time to start building a long-term position.