Palantir Vs General Dynamics: Which Defense Stock Is Better?

Palantir Technologies Inc (NYSE:PLTR) has Wall Street buzzing for its big-data approach to national defense, but General Dynamics Corporation (NYSE:GD) had a great 2021 too. The government contractor focuses on aerospace and national defense communications and gear too.

So, which is the better defense investment between Palantir vs General Dynamics?

GD is deeply invested in aerospace, and it’s more than just military that’s craving the company’s jet technologies. Private jets are rising in popularity among the wealthy elite who wish to travel with more social distance than a commercial flight can provide.

Meanwhile, Palantir is a data powerhouse that’s moving to leverage big data for advanced analysis and intelligence in more business sectors. The same underlying technologies helping in our nation’s counter-terrorism and cyber defense can help financial, healthcare, retail, and other industries automate their processes and get more done.

The Bull Case for Palantir

Palantir started in 2003 by a group of co-founders including PayPal (PYPL) billionaire Peter Thiel and company CEO Alex Karp.

It built out a data network and roster of data scientists to use artificial intelligence to scrape big data. This adaptive technology proved successful against high-tech cyber threats, making it a useful tool for intelligence agencies. Government contracts make up over half of the company’s revenues.

Cathie Wood’s ARK Invest holds a sizable position in the company because her team of analysts believe in Palantir’s opportunity to expand from the government to the commercial sector. Examples of commercial use include medical suppliers, who can optimize their supply chains to anticipate imbalances.

In times of demand or supply stress, Palantir can prove invaluable. The distribution at scale of vaccines is a recent use-case. In fact, the pandemic helped to prove the company’s value to businesses in every industry, which is why investors like Wood favor it.

The company is a play in more than just national defense – it’s on the cutting-edge of artificial intelligence and big data applications. Market expansion alone is expected to support a growth of 2x in the company’s valuation over the next 5 years.

Will Sales Growth Be A Problem For Palantir?

Although the company has a lot of upside, investors may not capture it in the short-term. Palantir notoriously has an investor-unfriendly governance structure that keeps Thiel, Karp, and President Stephen Cohen in what seems to be eternal control of the company.

It’s also difficult to get much transparency into the inner workings of the firm, which should be a red flag for investors. And that could prove to be a bigger problem as time goes, because the company burns through cash.

Palantir spent $165 million in 2019 on operations, which is an over 300 percent increase from the prior year. That only led to a 25 percent revenue increase.

It spent $450 million in marketing costs while general and administrative expenses were $321 million. That’s a big cash burn for a company not yet dropping much to the bottom line. It may be the wave of the future, but Palantir’s AI and data play isn’t flying off shelves just yet. Indeed there is concern that sales success is overly dependent on the CEO.

Is GD Stock a Good Buy?

Hedge funds are typically bullish on General Dynamics stock because of its massive government contracts. In fact, it secured a $395 million DHS data center contract in summer 2021 that continues the ongoing relationship with secured funds that long-term investors like.

The company can easily support its $50 billion+ valuation and should be able to continue growing as airlines pick up and the burgeoning space industry begins. That makes it a potential contender for a $100 billion market cap stock.

GD is mostly known for its aerospace division, but it’s involved in all manners of advanced technology and military contracts. And private jet sales are up in the wake of the pandemic, as the wealthy elite want to travel without the associated health risks of commercial flights.

Also, dividend investors appreciate the company’s high yield. It paid an impressive $4.76 annual dividend in the year following the pandemic and has raised its dividend annually for over a decade consistently.

This makes the company an attractive long-term hold, but top funds have never been less bullish on GD stock than in 2021, according to SEC filings. Why might institutional enthusiasm may be waning?

GD Stock May Be Best For Conservative Investors

The problem with government contracts is that they can come and go with changing administrations. The company had several issues in divisions like its Gulfstream segment. While the short-term revenues are rising, this could be temporary because of the pandemic and not indicative of a 10-year trend.

And the company’s marine segment may end up carrying other departments as it leans into a $9.5 billion U.S. Navy contract for Columbia submarines. It also has several T-AO Oilers coming down the pipeline.

On the whole, the company is relatively stable and has predictable revenues and earnings. For conservative investors that’s a plus. For risk-seekers, the upside surprise opportunity is limited.

Palantir Vs General Dynamics Stock: Which Is Best?

Palantir and General Dynamics are two defense contractors with growing revenues in the private sector. Although Palantir gets a lot of media buzz, the company is burning through cash. It has a long way to go toward fully monetizing its AI solution, however it has the potential to grow exponentially once it unlocks this potential.

In the meantime, rival General Dynamics is expanding its presence in the aerospace and marine industries to complement its existing government contracts. It’s also continuing to snag data center contracts that keep it afloat while the space industry grows.

Either company could be a great national defense play, but don’t expect more than a 2x growth over the next ten years from GD while PLTR could double in 5 years if revenues can be scaled more predictably and turned into bottom line growth.

 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.