One of the most polarizing and perhaps misunderstood businesses on Wall Street is Palantir Technologies (PLTR -0.53%). For years, the company was privately owned and funded by prominent Silicon Valley venture capitalists, notably Peter Thiel.
Unlike other startups, Palantir remained somewhat elusive during its time as a private company. Very little was known about its operation beyond its ties to the US government.
When Palantir hit public exchanges in late 2020, a dichotomy between retail investors and institutional funds formed almost immediately. The retail community liked it, largely thanks 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 a glorified consulting firm, posing 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 had another run.
Let’s dive into the earnings report and evaluate how the company is debunking Wall Street’s bearish argument.
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 called the company a contractor similar to RTX Corporation either Lockheed Martin.
There is a lot of money to be made in government contracting, but these deals tend to be lopsided and much less predictable than other traditional tech businesses. Management spoke at length about the company’s sophisticated data analytics capabilities based on artificial intelligence (AI); Wall Street just didn’t seem to believe it.
In fact, The Bear Cave’s Edwin Dorsey went so far as to declare Palantir an “AI imposter.”
The struggle is real, isn’t it?
Given the sentiment above, it’s clear that Wall Street had doubts about Palantir’s ability to penetrate the private sector. The following table illustrates its revenue trends between its government and commercial segments over the past few years.
|Annual growth in government revenue
|Annual business revenue growth
The table is a bit difficult to interpret. At first glance, it might seem like Palantir is moving in the wrong direction, given its slowing growth. Keep in mind that the last few years have been especially difficult for software companies, as companies of all sizes have reined in spending due to macroeconomic challenges.
The bigger issue is that Palantir’s commercial sector business overall is accelerating and no longer plays second fiddle to the legacy government segment. For the trailing 12-month period ended December 31, total customer numbers increased 35% year-over-year, but commercial customers increased 44%. It is important to understand this.
Basically, Palantir has done a phenomenal job of acquiring new customers, particularly beyond government agencies. However, the growth rates described above underline that it has yet to fully monetize this new business. For this reason, investors should be encouraged about the company’s future and potential for exponential growth.
The bears should go back to their caves.
Palantir was able to advance quickly in the private sector thanks to a creative lead generation strategy. Last year, the company launched 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 boot camps, during which potential customers could try out the company’s products and identify a use for AI.
Management says it hosted more than 500 training camps in 2023, up from 92 demo pilots in 2022. This increase underscores how much attention AI-powered products are attracting, and the company’s customer growth described above validates management’s assertion that “momentum in AIP is driving both new customer conversions and existing customer expansions.”
Palantir’s relentless growth in the commercial sector is undermining the bearish argument that it is just a glorified government contractor. Furthermore, the resounding success of AIP and the demand it is generating demonstrates that the company has developed impressive analytics software products.
While I suspect bears like William Blair analyst Louie DiPalma won’t be changing their tune anytime soon, the recent price action in the stock could suggest the company is becoming more accepted as an emerging leader in AI among its majors. technological counterparts.
Some might retort that the company’s government business is slowing, but a trend like this should be expected given the uneven nature of public sector deals. Furthermore, this argument doesn’t have much merit given that some on Wall Street initially bristled at Palantir for being too reliant on government contracts.
The company is building a strong business outside of its legacy government practice 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 around 40% below its all-time highs. For investors looking to gain exposure to high-growth AI companies, Palantir represents a unique opportunity beyond mega-cap tech. Now could be an interesting time to start building a long-term position.