The artificial intelligence (AI) race is in high gear. Much of the attention is focused on the investing-world darling Nvidia, and for good reason: The chipmaker is growing at lightning speed and reporting massive earnings.
Palantir Technologies (PLTR 0.44%) was representing AI well before it became more or less compulsory for every company in tech. Derived from The Lord of The Rings, the company's name provides a clue as to what it does. A palantir is a magical object that allows a user to see everything happening at once across a vast swath of land -- in other words, magical intelligence gathering.
Just trade magic for AI, and that is essentially what Palantir does. Its software-as-a-service (SaaS) products enhance information-gathering efforts for enterprise clients and, crucially, the U.S. government.
The company's government contracts are essential to its success
Before we consider any numbers or try to place a valuation on the company, we have to acknowledge the enormous advantage of Palantir's relationship with the U.S. government.
In general, this tends to be a boost to any company's bottom line not just because the contracts themselves are lucrative in straight dollar value (and indeed, they usually are), but because the government also is resistant to change. Getting it to work with you is hard; it can take years and is not a cheap process.
Once you do, however, Uncle Sam doesn't want to have to go through the same process again to find a new vendor if it doesn't have to. There's a lot of inertia in government contracts; once you win one, it's going to be mighty hard for a competitor to take it away from you. The real threat to a government contractor is a budget cut.
But Palantir isn't working with the Department of Education, it's working with the military and spy agencies; that's a whole different ball game. The vetting to work with such sensitive information would be astronomically more intensive than a normal process, and the Department of Defense doesn't want to repeat that anytime soon.
As for budget cuts, for better or worse, defense is not an area that sees too many significant ones. It's safe to say that money drying up for counterterrorism efforts isn't happening anytime soon.
Don't get me wrong: Financials are important, but sometimes a company has a qualitative advantage that can't be underestimated. I think Palantir has a huge one here.
It's not just government contracts -- business demand is high
Government contracts aren't the only thing going for the company. Its enterprise arm has contracts with major multinational companies around the globe, and its growth looks to be taking off.
The company reported 40% year-over-year growth in U.S. commercial revenue for the 2024 first quarter and had nearly 70% more U.S. commercial clients compared to the prior-year period. It is now working with clients as diverse as the AARP and Northrop Grumman. It appears that its technology's usefulness is becoming more apparent for enterprise clients, and this momentum builds on itself.
To further drive this momentum, the company hosts an annual conference in which its new clients demonstrate how Palantir's technology benefited them. This year will feature, among others, United Airlines.
Current valuations may seem high, but future potential justifies it
At present, Palantir has a price-to-earnings (P/E) ratio of more than 200. That's astronomical, but at least it has one.
It's not uncommon for a tech company to run in the red for years or barely turn a profit, propped up by venture capital investors who see its potential. Once the company settles in and figures out how to most effectively run its business, or its technology proves itself in the market, growth can happen at lightning speed, and all of a sudden its P/E comes back down to earth.
It's better here to look to the future -- say, the end of this fiscal year. Palantir has a forward P/E of 75. Now, this is still high, but it's a more reasonable mark for a company that is still in somewhat early days and growing rapidly.
To be sure, Palantir still has a lot to prove, but recent momentum, the endless uses for its technology, and its cozy relationship with the U.S. government make this a solid pick.
