Earlier this month, Ark Investment Management CEO Cathie Wood sat down for a podcast conversation hosted by former NBA stars Andre Iguodala and Evan Turner. While Iguodala may be best known for his NBA accolades, the athlete has a prolific career off the court as a start-up investor.
During the podcast, Wood spoke at length about major themes fueling the artificial intelligence (AI) narrative. One of the emerging players in AI is big data analytics company Palantir Technologies (PLTR 1.35%).
Wood has a large position in Palantir through her exchange-traded funds (ETFs). During her conversation, she put forth the idea that Palantir could end up being one of the largest AI companies in the world and even pose a threat to Microsoft (MSFT -1.04%).
Here's why I agree with Wood, and how Palantir could become one of the most lucrative investment opportunities in the AI realm.
Palantir's creativity is paying off
Big tech took the spotlight in 2023. Microsoft kicked off the AI revolution with a multibillion-dollar investment in ChatGPT developer OpenAI. Alphabet and Amazon both swiftly followed, with each investing in a competing platform called Anthropic. Moreover, chipmaker Nvidia invested in the world's most valuable privately held software start-up, Databricks.
With so much money flowing into high-profile AI businesses, it was easy for investors to overlook Palantir's moves. Last April, the company launched its fourth software application: the Palantir Artificial Intelligence Platform (AIP).
In an effort to commercialize the product in a low-cost, efficient way, Palantir began hosting immersive seminars called bootcamps. During these events, prospective customers have an opportunity to demo Palantir's various products and identify a use case centered around AI.
I find this lead generation strategy to be quite creative and effective. By showing customer leads exactly how Palantir can help bolster their AI ambitions, the company has experienced an acceleration in client growth.
In 2023, Palantir grew its overall customer base by 35% annually. But more importantly, the company increased its commercial customer count by 44%. This is important as skeptics have expressed doubt that Palantir will ever truly grow beyond its legacy government business and could fail to penetrate commercial enterprises.
Image source: Getty Images.
Microsoft is an 800-pound gorilla, but...
I'd say that Microsoft is primarily concerned with dethroning Amazon as the leader in cloud computing -- which it hopes to achieve by unlocking more value through ChatGPT. While this might not seem like a direct threat to Palantir, I'd caution investors against assuming Palantir has an economic moat.
Palantir does have some fierce competition -- and I've expressed previously that I see Microsoft's Fabric software platform as Palantir's primary threat.
Right now, the biggest risk surrounding Palantir is whether the company can keep up its momentum. Microsoft is a much larger, diversified company with a bigger balance sheet and budget.
Palantir has proven it can hold its own
The popularity of bootcamps has directly impacted Palantir's revenue growth. However, a more subtle feature of these seminars is that they've allowed Palantir to keep sales and marketing expenses relatively low.
Not only are sales moving in the right direction, but profits and free cash flow are, too. Palantir has reported positive net income on a generally accepted accounting principles (GAAP) basis for five consecutive quarters.
Despite the reality of intense competition, I'm not worried about Palantir. In fact, I see the competition with Microsoft as a positive thing -- one that could reap further innovation down the road.
But at a price-to-sales (P/S) ratio of 25.3, Palantir stock has gotten pricey. However, if you consider that the stock is trading approximately 35% below its all-time high, there's an argument to be made that Palantir's valuation is simply rightsizing from prior lows.
Given Palantir's focus on helping customers unlock data-driven insights to make more informed, impactful decisions at the enterprise level across a variety of industry sectors, I see it as a more prolific artificial intelligence (AI) platform than Microsoft.
In other words, AI is just a portion of Microsoft's overall conglomerate -- along with gaming, personal computing, and more. Palantir is relentlessly focused on furthering AI development, and has the technology engrained in its DNA.
While Microsoft's size and brand recognition shouldn't go overlooked, the long-term picture still looks encouraging for Palantir. For this reason, I think Palantir's premium valuation is warranted, and see much more room for upside over the long run.
