Economic moats can come in many different forms -- from a superior capital structure, intellectual property portfolio, or even strong relationships with customers, which can help build brand equity.
One of the rising stars in artificial intelligence (AI) is data analytics company Palantir Technologies (PLTR 3.73%). Let's examine the case for and against Palantir's moat and assess whether now is a good time to scoop up shares as the AI narrative takes shape.
Here, I've provided some reasons that could support the notion of Palantir's moat.
Robust intellectual property
Many start-ups rush to raise funding from venture capitalists and try to bring products to market as quickly as possible. Perhaps unsurprisingly, these companies often experience some pushback from early customers, as initial iterations of the product often come with glitches or do not meet the specific needs of the client.
Palantir was founded 21 years ago by Peter Thiel, Joe Lonsdale, and Alex Karp. One of the company's unique aspects is that it spent decades developing its software first, making commercialization a secondary responsibility.
The company reached $1 billion in revenue for the first time in 2019 -- nearly two decades after it was founded. And yet just three years later, Palantir generated over $2 billion in revenue last year. I think that by placing a premium on product capabilities first, Palantir is now just entering its main growth phase -- despite being a more than 20-year-old enterprise.
Strong brand appeal
As silly as it might sound, brand appeal can play a huge role in establishing economic moats. The fashion industry is a great example of this, with consumers often willing to pay premium prices for goods sold by certain brands.
In the tech environment, Tesla is one of the strongest brands out there. Unlike traditional automotive companies, Tesla is rarely seen bombarding consumers with commercials produced at a Hollywood level. It doesn't need to.
For better or worse, Tesla is synonymous with its outspoken CEO, Elon Musk. Musk's 176 million followers on social media platform X (formerly Twitter), which he also owns, gives him unprecedented reach to market the latest and greatest in Tesla's services. In other words, Musk is Tesla's marketing.
A similar dynamic applies to Palantir. The company's CEO, Alex Karp, often makes brazen comments during earnings calls and media interviews. While he never speaks ill of specific competitors, his confidence in Palantir's software is clear. This attitude has earned Karp the respect of prominent Wall Streeters such as Cathie Wood and Dan Ives and a loyal following from retail investors.
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Competitors
When it comes to debunking Palantir's moat, I really only see one big reason: competition.
Despite spending many years developing its intellectual property (IP) and artificial intelligence (AI) capabilities, Palantir faces competition from a number of larger players. In particular, Microsoft competes with Palantir through its Fabric offering.
While Microsoft is much more diverse than Palantir, operating in areas including personal computing and gaming, the company boasts $81 billion of cash and equivalents on its balance sheet. This provides Microsoft with sweeping financial horsepower, allowing the company to encroach on Palantir more seriously if it wants to.
Another competitor to Palantir is a privately held start-up called Databricks. According to the company, Databricks is operating at a $1.5 billion revenue run rate and growing 50% year over year.
Not only does this put the company within respectable distance of Palantir in terms of size, but the smaller company is growing much faster.
Does Palantir have a moat?
In essence, I don't think that Palantir has a true economic moat. However, I would say that the company has a significant competitive advantage in its deep IP.
The rate at which Palantir is accelerating its customer acquisition should not go unnoticed. In the fourth quarter alone, Palantir increased revenue from commercial customers in the U.S. by 70%. Moreover, Palantir also closed 103 deals during the last three months of 2023 -- 21 of which were worth at least $10 million.
This tells me that Palantir's services are in demand and the company is in the early innings of establishing itself as a leader in the AI landscape. So even though Palantir may not have a true moat, I still see the company as one of the best AI software opportunities in the market. Now could be a great time to scoop up some shares as Palantir continues to lead the AI story in enterprise software.
