The Bear Argument Against Palantir Is Collapsing. Here’s Why.


One of the most polarizing and perhaps misunderstood companies on Wall Street is Palantir Technologies (NYSE:PLTR). For years, the company was privately owned and funded by prominent Silicon Valley venture capitalists, including Peter Thiel.

Unlike other start-ups, Palantir remained somewhat elusive during its days as a private company. Very little was known about its operation beyond its ties to the U.S. government.

When Palantir listed on public exchanges in late 2020, a dichotomy formed almost immediately between individual investors and institutional funds. The retail community loved it, thanks in large part to its CEO, Alex Karp.

But Wall Street had a different opinion. Many research analysts viewed the company as nothing more than a government contractor or glorified consulting firm, masquerading as an enterprise software developer.

After a sharp sell-off in 2022, the stock rebounded strongly last year, jumping 167%. Since reporting its fourth-quarter and full-year 2023 results earlier this week, Palantir has cried again.

Let's take a look at the earnings report and assess how the company debunks 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 have characterized the company as a contractor-like RTX Company Or Lockheed Martin.

There's a lot of money to be made in public deals, but these deals tend to be piecemeal and much less predictable than other traditional tech companies. Management has spoken at length about the company's sophisticated data analytics capabilities, rooted in artificial intelligence (AI); Wall Street just didn't seem to believe it.

In fact, Edwin Dorsey of The Bear Cave went so far as to declare Palantir an “AI impostor.”

Image source: Getty Images

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 table below illustrates how its revenues have changed between its government and commercial segments over the past few years.

Category

2020

2021

2022

2023

Annual growth in public revenue

77%

47%

19%

14%

Annual growth in commercial revenue

22%

34%

29%

20%

Data Source: Palantir Investor Relations

The table is a little 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 past few years have been particularly difficult for software companies, as companies of all sizes have reduced spending due to macroeconomic challenges.

The larger theme is that Palantir's commercial sector business is generally accelerating and no longer playing a supporting role to the traditional government segment. For the 12 months ended Dec. 31, total customers increased 35% year-over-year, but commercial customers increased 44%. This is important to understand.

Essentially, Palantir has done a phenomenal job acquiring new customers, particularly beyond government agencies. However, the growth rates described above highlight that it has not yet fully monetized this new business. For this reason, investors should be encouraged about the company's future and its potential for exponential growth.

Bears should return to their caves

Palantir was able to quickly break into 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, the company began hosting immersive seminars called boot camps, where potential customers could test the company's products and identify a use for AI .

Management says it has hosted more than 500 boot camps in 2023, up from 92 demo pilots in 2022. The increase highlights attention for AI-based products, and growth in the company's customer base. above validates management's assertion that “AIP's momentum is driving both new customer conversions and existing customer expansions.”

Palantir's relentless growth in the commercial sector weakens the argument that it is just a glorified government contractor. Additionally, AIP's resounding success and the demand it generates prove that the company has developed impressive analytics software products.

While I suspect that bears like William Blair analyst Louie DiPalma won't change their minds anytime soon, the stock's recent price action could suggest that the company is becoming more widely accepted as an emerging leader in the AI among its big tech counterparts.

Some might counter that the company's government business is slowing down, but a trend like this is to be expected given the irregular nature of public sector deals. Additionally, this argument doesn't have much merit given that some on Wall Street initially soured on Palantir because it was too reliant on government contracts.

The company is building a strong business outside of its traditional government practices and using innovative AI-driven solutions to achieve this next phase of growth. Simply put, Wall Street can't have it both ways.

Despite the stock's rise, it is still trading about 40% off its all-time highs. For investors seeking exposure to high-growth AI companies, Palantir represents a unique opportunity beyond mega-cap technology. Now could be an interesting time to start building a long-term position.

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Adam Spatacco holds positions at Palantir Technologies. The Motley Fool ranks and recommends Palantir Technologies. The Motley Fool recommends Lockheed Martin and RTX. The Motley Fool has a disclosure policy.

The bears' argument against Palantir collapses. Here's why. was originally published by The Motley Fool



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