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Palantir's Secret Weapon That Could Make the Stock Go Parabolic

By Jamie Louko – Dec 16, 2021 at 7:00AM

Key Points

  • Palantir is allowing governments and companies to make sense of unstructured data.
  • One major competitive advantage Palantir has is Apollo.
  • Although the company’s profitability hasn't been perfect, it still maintains a sustainable edge.

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Palantir is a secretive company, but that isn't the only thing that could make it a major success.

Analytics and software company Palantir Technologies (PLTR 1.46%) has been a controversial company since it rose to popularity in September 2020 after its initial public offering (IPO). The company has been historically centered around secrecy because of its contracts with some of the U.S. federal government's largest intelligence agencies.

Its confidentiality, however, isn't why I am fond of the company. The reason is its other competitive advantages. And one of those advantages is Apollo. This software is something that very few competitors have ever been able to build as well as Palantir. Apollo could make the company a major success. 

Person cheering while looking at his laptop.

Image source: Getty Images.

Keeping data close to the vest

Why is Palantir so secretive? The company works with the U.S. Army and the Department of Defense (DoD) by helping them notice trends deep within data sets and take action on the data that is hard to analyze. This makes Palantir the key holder for some of the government's most important data. It has since moved toward offering its services to the commercial sector in 2016 -- allowing for its business to be slightly de-mystified. The company still maintains some of the covertness, because roughly half of its revenue comes from government contracts.


Palantir has two solutions: Gotham (software for governments) and Foundry (for commercial companies) and the operating system for these is Apollo. Apollo gives customers secure, continuous, and independent stability. Apollo ensures that critical systems are secure and up to date 24/7 by being the control layer for coordination of security updates and adding features.

With its extremely high level of security clearance, Apollo is just one of five software-as-a-service (SaaS) offerings that are cleared for mission-critical National Security Systems by the DoD. This is considered IL5 clearance, one step below IL6, which accommodates DoD's classified information.

Apollo is (quite literally) one of the best solutions in the world, and it is being used by some of the most clandestine agencies. The adoption of Apollo software by government agencies shows how much the government trusts and relies upon Palantir. The usage by high levels of government is a significant advantage that Palantir can flex to show how trustworthy its solutions are to potential customers (both commercial and governmental).

Palantir has other competitive advantages, including high switching costs and a sticky product. In the third quarter, Palantir only established 54 new contracts, but 51 of them were worth over $5 million each. If a customer wanted to cancel a contract, Palantir would lose a significant amount of money. Yet, since these contracts integrate lots of customer data and capabilities into Palantir's system, switching to a new system would be costly for a customer. Also, noting there are very few competitors with a level of security comparable to Palantir's, customers likely wouldn't want to consider another provider.

Palantir's growing brand name has allowed the company to spend less on attracting hefty contracts. In the third quarter of 2021, the company only spent $153 million on sales and marketing compared to $335 million in the year-ago quarter.

The risks and rewards

The company has seen massive increases in adoption from the commercial sector, which has led to impressive business performance for Palantir. In Q3, commercial revenue grew 103% year over year, resulting in total revenue growth of 36% year over year to $392 million. Despite this success, the company is losing plenty of money.

Palantir lost 26% of revenue, or $102 million, in Q3 2021. But, the company has been able to improve the net loss substantially. In Q3 2020 the company lost over $850 million. This has primarily been due to declines in expenses likely because of its increased reputation and rapid commercial adoption. If the company continues to leverage its high switching costs and unmatched security features to build its brand name, investors could expect further improvement to the net loss which could ultimately lead to a pathway to profitability. 

However, if the company were to lose its security reliability, the company could come crashing down. Its brand reputation hinges on the amazing relationships and reliability it has built on its security, and one breach could greatly impact these relationships. 

Palantir sees a robust growth path ahead of it. It expects to grow its top line at an annual rate of 30% or more from now until 2025. Assuming the company grows at that 30% from its full-year 2021 revenue guidance of $1.5 billion, it could reach almost $4.4 billion in revenue by 2025. Such a growth rate is entirely possible. As a leading-edge company that is seeing rapid adoption in the commercial sector, Palantir might very well explode over the next five years if it can continue to exploit its competitive advantages.

Jamie Louko owns Palantir Technologies Inc. The Motley Fool owns and recommends Palantir Technologies Inc. The Motley Fool has a disclosure policy.

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