Palantir Technologies (PLTR +1.27%) stock has experienced an impressive run, rising 2,700% since hitting its low point in 2022 and 575% over the past five years. The stock trades at a very high valuation, but I plan to hold shares indefinitely because Palantir is a competitively positioned software company with a long runway of growth.
Its high profit margin reflects a one-of-a-kind software offering. The U.S. government and major corporations are willing to spend a significant premium to use Palantir. This points to a wide competitive moat, which could ultimately make Palantir one of the largest software companies by revenue in the future.
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Palantir's lucrative competitive advantage
At the heart of Palantir's offering is its artificial intelligence (AI) platform. Enterprises can deeply integrate Palantir's software into their operations to achieve significant efficiencies and cost savings. It's used for everything, from field operations by the U.S. military to helping professional race car drivers improve on-track performance. It also helps the largest companies manage the most complex supply chains in the world.
While competitors such as UiPath and ServiceNow offer automation software for enterprises, it's not the same as Palantir's ontology-based system. For example, Palantir can create a digital copy of a business that models the relationship between its suppliers, shipments, and inventory. This helps companies identify inefficiencies and address money-losing issues.
Palantir is saving its customers significant money, which ultimately allows the company to earn lucrative margins on sales. Over the last year, Palantir generated nearly $1.8 billion in free cash flow on $3.9 billion of revenue. That's a stellar free-cash-flow margin of 49%, and it continues to trend higher. By comparison, ServiceNow is a larger business with over $12 billion in annual revenue, but it generates a 30% free-cash-flow margin.
NASDAQ: PLTR
Key Data Points
Long-term growth potential
Palantir's competitive moat and high margins are well reflected in the stock's valuation. The shares trade at a premium of 261 times free cash flow. However, when considering Palantir's exponential growth and the potential revenue it may generate over the next decade, its valuation becomes more justifiable.
CEO Alex Karp has stated that the goal is to increase revenue by 10 times with fewer employees, implying that the company can achieve more than $40 billion in annual revenue. With analysts expecting revenue to grow at an annualized rate of 37% through 2029, Palantir could accomplish this goal within the next decade.
Palantir's competitive position could allow the business to grow its revenue well beyond $40 billion. If the company maintains its current margin, that would leave about $20 billion in annual free cash flow. That brings its price-to-free cash flow multiple down significantly.
A company that is delivering "immediate, asymmetric value" for its customers, in Karp's words, is going to grow into a large business and build wealth for shareholders. It wouldn't be earning industry-leading margins if Palantir weren't delivering significant value to its customers. I expect Palantir to become one of the largest tech companies by market cap in the coming decades.
