With shares up almost 150% in the past 12 months, Palantir Technologies (PLTR 1.72%) isn't missing out on the artificial intelligence (AI) boom powering the tech industry right now. But while hardware giants like Nvidia are making most of the early money, software could become increasingly important over the coming decade.
Let's discuss what the next 10 years could have in store for the big-data specialist as it seeks to leverage its position in the defense and law enforcement sectors to help introduce this transformational technology.
A strong moat and an attractive business model
Palantir is a software-as-a-service (SaaS) company that helps its clients turn big data into actionable insights. The SaaS business model involves providing a continually updated software solution in return for periodic subscription fees. It is particularly attractive for investors because these companies can enjoy consistently recurring and compounding revenue, which makes them easier to scale.
Palantir has the added advantage of a close relationship with the U.S. government and its allies. As a start-up, the company was partially funded with the help of the CIA's venture capital arm, In-Q-tel. And many of its employees have security clearances to handle sensitive information. These characteristics create an economic moat around its government contracting business, which generates over 50% of its revenue.
The next 10 years could expand Palantir's market
While most people hope for a peaceful future, the geopolitical environment is incredibly tense, with flashpoints in Eastern Europe, the Middle East, and East Asia. U.S. allies are beginning to take advantage of AI technology to maintain an edge over their adversaries.
Recently, Palantir signed a series of deals with Ukraine to help it with military targeting and de-mining efforts over the next decade. The company has also inked a strategic partnership with Israel to provide AI support for war-related missions. Unsurprisingly, these types of contracts can expose Palantir to potential political and reputational risk.
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According to CEO Alex Karp, Palantir has lost employees over its leadership's vocal support of Israel, and he expects to lose more. But by embracing this work, Palantir may win opportunities missed by others like Alphabet, which has felt similar pressures. In the end, these issues don't seem to be having a near-term impact on Palantir's ability to gain and retain private-sector corporate clients.
Fourth-quarter revenue grew 20% year over year to $608 million, while U.S. commercial revenue grew a whopping 70% to $131 million. Maintaining strong public sector growth could be key to diversifying Palantir's business and maintaining its long-term expansion.
Can Palantir grow into its valuation?
The trickiest thing about the stock market is that a fantastic company won't always make a worthwhile investment -- mainly, because of valuation. Investors often bid up the price of stocks with great long-term potential, leaving little room for new money to get involved.
With a price-to-earnings (P/E) multiple of 66, Palantir isn't cheap compared to the Nasdaq Composite's average of 31. But the valuation makes much more sense when considering its bottom line momentum. Net income almost tripled to $97 million, and its SaaS business model could lend itself to substantial profit potential as operations continue to scale up.
While Palantir stock isn't cheap, the company's burgeoning profitability and strong moat in government contracting make it look poised to continue outperforming the market over the next 10 years.
