Three years ago, data analytics company Palantir (PLTR 3.73%) debuted on public markets through a direct listing. Since then, its shares have risen around 80%, with most of that growth coming from a recovery in 2023 as investors became more optimistic in its ability to incorporate new generative artificial intelligence (AI) tech into its business model. Let's explore what the next 10 years could have in store for the company.
Palantir's unique take on machine learning
Palantir is an American software company known for data fusion and mining, a process that involves analyzing a large volume of information and combining data from different sources into useful insights. The company is unique because of its significant exposure to sensitive government clients and missions.
According to CNBC, Palantir's software helped the U.S. find Osama Bin Laden in 2011. And it is currently used to help the Ukrainian armed forces with targeting in the war with Russia.
So far, Palantir's business is performing reasonably well. Third-quarter earnings grew 17% year over year to $558 million, with the fastest growth coming from its commercial clients, which increased 23% to $251 million -- a bit under half of the total. Public sector deals represented the rest.
While Palantir's government contracts give its business stability and a solid niche (not every company is trusted to deal with such classified and sensitive information), commercial clients could represent a significant potential growth opportunity in the future. Management is rapidly incorporating generative AI into its business model to make its software solutions more useful to potential enterprise clients.
AI will become a bigger part of the business
Generative AI is a unique subfield of artificial intelligence where algorithms are designed to create new content based on vast arrays of training data. While this is distinct from Palantir's legacy data management businesses, the two technologies synergize well. For example, generative AI could help automate Palantir's analytics process or give clients real-time conversational insights about their data in fast-paced scenarios like battlefields or law enforcement operations.
Image source: Getty Images.
In April, Palantir launched its new Artificial Intelligence Platform (AIP), designed to add AI to its existing software offerings like Gotham, which is for government uses, and Foundry, geared toward the private sector.
Bloomberg Intelligence expects the total generative AI market to be worth a jaw-dropping $1.3 trillion by 2032, with a significant portion of the opportunity coming from software. Over the next 10 years, investors can expect Palantir's AI efforts to become a key growth driver as the technology improves and more organizations implement it into their operations. Palantir's public sector relationships and existing data mining business could give it an edge against potential rivals that may emerge.
Palantir can justify its valuation
Valuation will also be a big concern for long-term Palantir investors. With a forward price-to-earnings multiple of 61, the company trades at a substantial premium to the S&P 500's average of 26. But the price looks somewhat justified by the company's solid bottom-line momentum.
Third-quarter net income jumped from a loss of $123.9 million to a gain of $80 million, capping off Palantir's first four consecutive quarters of profitability under generally accepted accounting principles (GAAP). The company's burgeoning profitability and cash flow could give it a stable foundation for its AI expansion over the coming years. And shares look capable of outperforming the market.
