From technological feats to privacy controversies, analytics company Palantir (NYSE:PLTR) has generated a great deal of attention since its IPO in 2020. Until recently, however, the company had always been a high-growth, pre-profit firm.
Today, Palantir has achieved a low level of profitability and is planning a rapid expansion based on new AI-enhanced tools. So what does Palantir actually do?
Palantir is a software company that builds data analytics platforms for intelligence and law enforcement agencies. Prior to its IPO, Palantir worked with the United States military, CIA and NSA.
More recently, the company has broadened its appeal by rolling out data analytics tools for commercial clients. Among the most recent tools introduced by Palantir is a suite of workflow management tools for life sciences companies.
Palantir’s Growth
Despite at one time commanding much higher share prices than it does today, Palantir has only recently achieved profitability. Q1’s net earnings totaled $17 million or $0.01 per share. This was the second consecutive quarter of positive earnings, following $0.02 per share in Q4.
The company has, however, seen steady revenue growth since its IPO. Its first quarterly report in 2020 detailed just $252 million in total revenue. The latest earnings report features $525 million in revenue, demonstrating just how far the company has come in the last few years.
In Q1, revenue grew 18 percent year-over-year. Encouragingly for the firm, growth was roughly balanced between its commercial and government customers. Government-associated revenues grew 20 percent, while commercial revenues grew 15 percent.
The past year has also seen a 41 percent spike in Palantir’s customer count. If Palantir can keep these growth rates up while continuing to maintain its current margins, the company could gradually improve its earnings over the next several years.
Management currently expects modest growth to continue throughout 2023. Palantir projects total revenues of up to $2.235 billion this year with positive GAAP income in each quarter.
Over the next 3-5 years, analysts expect Palantir’s earnings to grow at rates of nearly 60 percent annually. Investors should keep in mind, however, that these expectations may be overly optimistic, as such high growth rates are often difficult to maintain for extended periods of time.
Palantir’s Potential
While Palantir has only achieved the slimmest possible profitability, bulls believe the company still has enormous potential as demand for data analytics platforms spikes.
Much of the bullish view on Palantir is driven by its coming rollout of an artificial intelligence platform (AIP). The platform is expected to be introduced to some of the company’s existing clients this quarter, with a broader release to follow.
Due to Palantir’s existing government connections and experience handling sensitive data, the company is in a natural position to secure long-term AI contracts. Its goal, however, is to move aggressively into the field of AI-enhanced data analytics, grabbing up market share in an emerging field with few strictly defined competitive lines.
Palantir’s Challenges
Despite its potential, Palantir faces many challenges that could threaten the company’s newfound success. First among these is the risk posed by potential cybersecurity issues.
The company places great emphasis on its information security practices. In the event of a major data breach that undermined confidence in the company’s security protocols, Palantir’s stock price and growth prospects could both be negatively affected.
It is also still operating at tiny profit margins that it will need to drastically improve to see substantial earnings growth. The company’s net margin on a non-adjusted basis last quarter was just 1 percent, though the adjusted number was much more positive at 24 percent. With its extremely low GAAP earnings, Palantir will either have to cut costs or raise revenues to drive meaningful growth in net income.
Palantir is currently focusing its efforts on the AI space, but its strategy in this field is at best ill-defined. The company plans to grab up market share by rolling out tools that leverage its data analytics expertise. However, there is no immediate plan for pricing or expanding the reach of its AIP. This uncertainty could be a strategic problem for Palantir, especially if investor enthusiasm for AI wanes.
Palantir’s Competition
One of Palantir’s advantages is the fact that much of its business comes from government contracts that represent largely stable and predictable revenue streams. As the company ventures more into the commercial world, however, it is increasingly exposed to competitive pressures from other data analytics platforms. Among the company’s key competitors is Alteryx, a data analytics platform company with similar products to Palantir.
As much of Palantir’s potential is currently based on AI, it’s also fair to count other leading AI firms among the company’s direct competition.
NVIDIA, for example, is also pushing an AIP that could compete with Palantir’s for enterprise customers. Large tech firms like Microsoft and even Meta are currently investing in the next generation of AI tools, calling into question whether Palantir can easily grab off market share.
Palantir’s Future
Palantir is a company with both significant potential and considerable risks from an investor perspective. While the company has achieved profitability, its major growth catalyst at the moment seems to be the expansion of its AI tools. This strategy has real potential for Palantir, but the lack of a well-defined growth plan and stiff competition in the AI space could present significant difficulties.
It’s also worth noting that Palantir still appears to be overvalued at today’s prices. The stock trades at over 300 times forward earnings and over 17 times sales.
Although Palantir has recently produced some positive results, justifying these metrics will require sustained high growth rates. Due to the recent introduction of its AI-powered platform, Palantir appears to have gotten caught up in what increasingly seems to be an artificial intelligence bubble.
Ultimately, Palantir appears to be in a transitional phase of its business. Having achieved narrow profitability while raising its revenues and rolling out next-generation products, Palantir could have a bright future. However, the company’s long-term prospects are still quite unclear. Coupled with its sky-high valuation, this fact makes Palantir a stock that investors may want to watch but would likely be better off to avoid buying.
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