Palantir (PLTR +3.03%) has been one of the stock market's biggest success stories over the last two years.
Shares of the AI software company, which is best known for its work with government defense and intelligence agencies, have soared by 1,000% in that period, and were up by nearly 1,500% before a recent pullback.
The company gained favor with investors and clients largely due to its Artificial Intelligence Platform (AIP), which has enhanced the utility of its technology and driven faster top-line growth. In fact, its revenue growth accelerated every quarter for the last year and a half, and its streak of operating margin expansions is even longer (adjusting for the impact of a stock award in the fourth quarter).
Its revenue jumped 36% in the fourth quarter to $828 million, but nearly all of that growth came from the U.S market. Palantir's domestic revenue surged by 52% to $558 million with strong growth in both the commercial and government segments.
Palantir got its start assisting U.S. intelligence and defense agencies in their counterterrorism efforts, so it's not surprising that the U.S. government still accounts for roughly 40% of its total revenue. But the company's strength at home has not been translating overseas lately. In Europe, revenue grew just 4% in Q4, and that could be a problem for a stock that's trading at sky-high valuations.
Image source: Getty Images.
Lost in translation
On the latest earnings call, CEO Alex Karp noted that growth in Europe was "anemic." The market amounts to about 13% of the company's total revenue, and grew at just 4%.
He bemoaned Europe's slower pace of tech adoption, adding: "It does look like the continent of Europe will look to the past as a way of getting to the future, struggles with the idea that all the valuable technology in this area is built in America."
Palantir does have a number of major clients in Europe, including the U.K.'s National Health Service (NHS), but the company's sluggish performance in Europe may reflect the reputational risk of dealing with a secretive company known for aiding militaries. It may face additional headwinds from worsening U.S.-European relations, and general macroeconomic challenges in the market.
Palantir has faced pushback in Europe on multiple fronts. Activist groups organized to protest against its $420 million contract with the NHS, and France's national security agency reportedly ended its contract with Palantir in 2023, choosing to build its own system instead. Meanwhile, a German court blocked the use of technology like Palantir's because it profiles people who are not accused of any crimes, which is an invasion of their privacy.
Karp's complaints seem to indicate that the company doesn't have a strategy in mind for reaccelerating its growth in Europe, but finger-pointing and name-calling seem like poor tactics at a time when trans-Atlantic political relations already seem to be rapidly souring.
NASDAQ: PLTR
Key Data Points
Why it matters
Most large software companies count on international markets for significant amounts of their revenue. Salesforce booked 67% of fiscal 2024 revenue from the Americas, with 23% coming from Europe, and 10% from the Asia-Pacific region.
ServiceNow derived 63% of its revenue from North America in fiscal 2024, with 26% coming from the Europe, Middle East, and Africa region, and 11% from its Asia-Pacific and other regions.
Those are the kinds of companies that make up Palantir's peer group now that its market cap has ballooned to more than $200 billion.
Finding success in international markets would give Palantir additional revenue streams. Those could become even more valuable if recent proposals for Pentagon budget cuts become reality, and it would also offset some of the concentration risk the company faces due to its overreliance on the U.S. market.
In 2024, 66% of the company's revenue came from the U.S., putting it on par with Salesforce and ServiceNow. But given the recent trends, that percentage is likely to skew further toward the U.S., meaning Palantir will have to outperform at home to compensate for weak performances abroad.
Investors shouldn't ignore that risk, especially as the stock trades at a lofty price-to-sales ratio of 87. From that valuation, it wouldn't take much bad news to send Palantir stock sliding.
