An up-and-coming name in the red-hot artificial intelligence (AI) arena is Palantir Technologies (PLTR 1.38%). For much of its history, Palantir worked closely with the U.S. government and its Western allies.
However, over the last couple of years the company made a conscious effort to expand outside of the public sector. Indeed, this strategy is paying off as Palantir witnessed impressive growth in the private sector in 2023.
But with growth in the legacy government business slowing, some investors may be concerned. Let's explore the trends in Palantir's government-contracting operation and assess the moves the company is making to cement it's long-term potential.
Palantir's government business is plateauing, but...
The table below breaks down the annual percent growth of Palantir's government business and private sector operation.
| Category | 2023 | 2022 | 2021 |
|---|---|---|---|
| Government Revenue % Growth | 14% | 19% | 47% |
| Private Sector Revenue % Growth | 20% | 29% | 34% |
| Total Revenue Growth % Growth | 17% | 24% | 41% |
Data source: Palantir investor relations.
The broader theme is that the growth of Palantir's government business slowed significantly in just a couple of years. But in a way, this makes sense. In addition to the company aggressively pursuing the private sector, investors should keep in mind that government-contracting business generally experience ebbs and flows.
This is due to a variety of factors including current economic conditions, as well as budgetary priorities for lawmakers. Simply put, the specific areas of government spending and budget allocations vary on a year-to-year basis.
Nevertheless, Palantir announced a new partnership that could help reignite some business for its legacy government segment.
Image source: Getty Images.
...things could quickly turn around
A couple of years ago, the U.S. Department of Defense announced that it was working with Amazon, Alphabet, Microsoft, and Oracle for its cloud computing needs. The deal is called the Joint Warfighting Cloud Capability (JWCC) contract.
In early April, Palantir made headlines following news that it partnered with Oracle in an effort to marry AI and cloud infrastructure. Per the deal, Palantir will deploy data workloads from its Foundry and Gotham platforms to Oracle's cloud suite.
Palantir Executive Vice President Josh Harris commented on the deal, stating that both companies are "dedicated to defending [W]estern interests and institutions around the world."
I see this relationship as a major step forward for Palantir growing is government business. Leveraging Oracle's existing footprint within the federal government provides Palantir with a unique opportunity to upsell and cross-sell customers, thereby paving a path to accelerate its legacy public sector operation.
Should you invest in Palantir stock right now?
Following Palantir's fourth-quarter and full-year 2023 earnings report in mid-February, I put forth the idea that the bear argument for Palantir was beginning to crumble. For many years, skeptics labeled Palantir as a glorified consulting operation with no real tech chops.
But if the revenue allocations analyzed above prove anything, it's that Palantir is making notable strides outside of the government. The primary reason for this growth is that Palantir is demonstrating the depth of its products across a variety of use cases beyond the needs of federal agencies -- and some big names on Wall Street are taking notice.
Ark Invest CEO Cathie Wood recently said that she believes Palantir's opportunity in AI is enormous and that the company can compete with the biggest names in the industry. Moreover, research analyst Dan Ives currently has a $35 price target for Palantir stock, implying roughly 52% upside from current trading levels.
At a price-to-sales (P/S) ratio of 24, Palantir is a bit pricey. However, the company is consistently profitable on a generally accepted accounting principles (GAAP) basis and is growing free cash flow at an impressive rate.
This provides Palantir with a high degree of financial flexibility, which the company can use for additional product innovation, marketing, and more.
I suspect the partnership with Oracle will augment Palantir's existing lead-generation pipeline, and I wouldn't be surprised to see an uptick in public sector growth. However, like all opportunities, investors should remain patient and employ a long-term mindset. AI and cloud computing are both in early innings, all things considered.
While the potential for Palantir's partnership with Oracle could be lucrative, it will likely take some time for the relationship to take shape. Nevertheless, I see Palantir as a compelling buy right now and encourage investors to consider adding the company to your list of AI opportunities.
