Sparked by the release of OpenAI's ChatGPT in 2022, the generative artificial intelligence (AI) boom has given companies like Palantir (PLTR 0.46%) a new lease on life. But with its shares up 73% over the past 12 months, has all the growth already been priced in? Let's explore what the next five years could have in store for this software company.
Why Palantir?
Founded in 2003 and going public in 2020, Palantir Technologies can be considered an "early" AI company -- pioneering technologies like machine learning and big data analytics. The company operates a software-as-a-service business model in which clients pay a recurring fee for access to its two main platforms: Gotham (targeted at corporate clients) and Foundry (designed for government contracting, security, and defense).
NASDAQ: PLTR
Key Data Points
Palantir's defense contracting is key to its economic moat. Unlike the typical software company, Palantir has a long track record of working on classified and sensitive missions, such as the Osama Bin Laden raid in 2011. More recently, the company has helped the Ukrainian armed forces with targeting in their war against Russia. And in January, Palantir inked a deal with Israel to provide services for war-related missions.
But while bringing big tech to conflict zones strengthens Palantir's moat, it could also expose the company to brand damage -- making it more difficult to appeal to the private sector clients that help drive growth and diversify its revenue streams. So far, this doesn't seem to be a problem. First-quarter commercial revenue jumped 27% year over year to $299 million, while government revenue grew 16% to $335 million.
The next five years for Palantir
Palantir's long-term future will depend on how well it can integrate large language models (LLMs) and other generative AI technologies into its existing data analytics solutions. But unfortunately, the commercial side of this opportunity seems incredibly competitive.
Rivals like Snowflake and Microsoft's Fabric offer similar data analytics software without Palantir's political baggage. These companies also boast an in-house cloud computing focus, while Palantir's Foundry relies on third-party cloud service providers like Amazon's AWS, Google Cloud, and Microsoft Azure.
Image source: Getty Images.
The good news is that Palantir's government business looks set for a sustainable boom over the coming years. The geopolitical environment feels as tense as ever with flashpoints in Europe, Africa, the Middle East, and Asia. Meanwhile, personnel shortages and new technologies (such as drones) are increasing demand for the type of labor-saving automation Palantir's software can provide.
Along with its work with U.S. allies, Palantir has also scored big contracts with the U.S. Department of Defense. Most recently, it won a $480 million deal with the Army to work on the Maven Smart System, designed to use AI and computer vision to quickly and accurately identify enemy targets. Alphabet walked away from this project in 2018 amid widespread employee protests over ethical concerns. But Palantir's unapologetic defense work makes it more resilient to this type of pressure.
Over the next five years, investors should expect defense contracting to become an increasingly important part of Palantir's overall business.
Is Palantir stock a buy?
Palantir is well-positioned to benefit from improving AI technology and its growing military use cases. But a good company isn't always a great stock. In Palantir's case, valuation is cause for concern.
With a forward price-to-earnings ratio of 70, Palantir's shares are dramatically more expensive than the Nasdaq average of 32. And despite Palantir's strong moat, this is too much to pay for a company that only grew its revenue by 21% in the first quarter. Overvaluation could cause shares to underperform the wider market over the next five years.
