One of the most polarizing and perhaps misunderstood, businesses on Wall Street is Palantir Technologies (PLTR 3.73%). For years, the company was privately held and bankrolled by prominent Silicon Valley venture capitalists -- most notably, Peter Thiel.
Unlike other start-ups, Palantir remained somewhat elusive during its time as a private company. Very little was known about its operation beyond its ties to the U.S. government.
When Palantir hit the public exchanges in late 2020, a dichotomy was formed almost immediately between retail investors and institutional funds. The retail community took a liking to it, thanks in large part to its CEO, Alex Karp.
But Wall Street had a different opinion. Many research analysts saw the company as no more than a government contractor or a glorified consulting business, masquerading as an enterprise software developer.
After a brutal sell-off in 2022, the stock rebounded sharply last year, surging by 167%. Since reporting earnings for the fourth quarter and full year 2023 earlier this week, Palantir has been on another tear.
Let's dig into the earnings report and assess how the company is debunking Wall Street's bear argument.
Isn't Palantir just a government contractor?
Palantir works closely with the U.S. government and its Western allies. Given the company's reliance on large public-sector deals, many on Wall Street dubbed the business a contractor similar to RTX Corporation or Lockheed Martin.
There is a lot of money to be made in government contracting, but these deals tend to be lumpy and are far less predictable than other traditional technology businesses. Management spoke at length about the company's sophisticated data analytics capabilities rooted in artificial intelligence (AI); Wall Street just didn't seem to buy it.
In fact, Edwin Dorsey of The Bear Cave went as far as to declare Palantir an "AI imposter."
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The struggle is real, or is it?
Given the sentiment above, it's clear that Wall Street had its doubts over Palantir's ability to penetrate the private sector. The table below illustrates its revenue trends between its government and commercial segments over the last several years.
| Category | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|
| Government revenue annual growth | 77% | 47% | 19% | 14% |
| Commercial revenue annual growth | 22% | 34% | 29% | 20% |
Data source: Palantir investor relations
The table is a little tough to interpret. On the surface, it might appear that Palantir is moving in the wrong direction, given its slowing growth. Keep in mind that the last couple of years have been especially tough for software businesses as companies of all sizes have reined in spending due to macroeconomic challenges.
The more important theme is that Palantir's commercial sector business is generally accelerating and is no longer playing second fiddle to the legacy government segment. For the trailing-12-month period ended Dec. 31, the total customer count increased 35% year over year -- but the commercial-sector customer count rose 44%. This is important to understand.
Essentially, Palantir has done a phenomenal job acquiring new customers, particularly beyond government agencies. However, the growth rates depicted above underline that it has yet to fully monetize this new business. For this reason, investors should be encouraged about the company's future and the potential for exponential growth.
The bears should go back into their caves
Palantir was able to swiftly make inroads in the private sector thanks to a creative lead-generation strategy. Last year, the company released its fourth major product, the Artificial Intelligence Platform (AIP). In an effort to market the product amid intense competition, it started hosting immersive seminars called boot camps, during which prospective customers could test the company's products and identify a use for AI.
Management says it hosted over 500 boot camps in 2023, compared to 92 demo pilots in 2022. This increase underscores how much attention AI-powered products are garnering, and the company's customer growth outlined above validates management's claim that "momentum in AIP is driving both new customer conversions and existing customer expansions."
Palantir's unrelenting growth in the commercial sector is weakening the bear argument that it is just a glorified government contractor. Moreover, the smashing success of AIP and the demand it's generating proves that the company has developed impressive analytics software products.
While I suspect bears such as analyst Louie DiPalma at William Blair won't change his tune anytime soon, the recent price action in the stock could suggest that the company is becoming more widely accepted as an emerging AI leader among its big tech counterparts.
Some might counter that the company's government business is decelerating, but a trend like this should be expected given the lumpy nature of public sector deals. Furthermore, this argument doesn't hold a lot of merit given that some on Wall Street initially soured on Palantir for being too reliant on government contracts.
The company is building a strong business outside of its legacy government practice, and it's using innovative solutions driven by AI to achieve this new phase of growth. Simply put, Wall Street can't have it both ways.
Despite the run-up in the stock, it still trades about 40% off its all-time highs. For investors looking to gain exposure to high-growth AI businesses, Palantir represents a unique opportunity beyond megacap tech. Now could be an interesting time to start building a long-term position.
