In late October, I wrote a bullish post about Palantir (NYSE:PLTR) for InvestorPlace. At the time, the shares were trading at about $10. And yes, since then Palantir stock has surged – reaching $29.80. The market capitalization is now at $52 billion. Honestly, I did not expect this kind of action!
Here’s some background on the company: Founded in 2003, Palantir initially focused on building sophisticated analytics and artificial intelligence systems for the U.S. government, such as to track down terrorists or enemies on the battlefields of Afghanistan and Iraq.
Much of the activities have remained confidential. But there is buzz that Palantir’s technology was instrumental in finding Osama bin Laden.
Yet over the years, the company has expanded beyond its governmental roots. Note that Palantir’s software is now sold across a variety of industries, such as in health care, energy and manufacturing.
Back in September, the company came public via a direct listing. This means that the shares were sold by the insiders and there was no money raised. Interestingly enough, there were technical issues with the debut. But of course, this only meant that investors had a good opportunity to get a good value.
The Growth Story
Simply put, the main reason for the strength in Palantir stock has been the acceleration of growth. In the third quarter earnings report, the company posted a 52% jump in revenues to $289.4 million. There was also a raise for the full-year guidance to $1.070 billion to $1.072 billion, up 44% on a year-over-year basis.
Both the governmental and commercial businesses are running at a quick pace. For example, with the government segment, Palantir was awarded a two-year contract for $91 million for the U.S. Army Research Laboratory.
This will be for using AI and machine learning for improving military planning and defense operations. Keep in mind that there were 999 bids for this deal! There was also a $36 million contract for the National Center for Advancing Translational Sciences to help with cancer and Covid-19 virus research.
As for the commercial segment, there were a variety of notable deals in the quarter. For example, there was a five-year $300 million contract renewal for an aerospace customer. Because of the Covid-19 pandemic, the sector has seen much more urgency for digital transformation.
Consider that Palantir software has been shown to generate substantial ROI (Return On Investment). An example of this is an oil and gas customer that was able to save $57 million within weeks of launching the system. The company has since identified $315 million additional cost saving opportunities and the hope is that they will ultimately exceed $1 billion.
As a sign of the strategic important of the Palantir platform, there has been a strong ramp in the average contract values. They have gone from $4.2 million – for the first nine months of last year – to $5.8 million for the same period this year.
Bottom Line on Palantir Stock
For the most part, the biggest knock on Palantir stock is the valuation. Note that the shares are trading at about 47 times revenues! But of course, there are high valuations across many of the early-stage tech operators right now like Zoom Video Communications (NASDAQ:ZM), Okta (NASDAQ:OKTA), Docusign (NASDAQ:DOCU) and so on.
But Palantir is a unique company. It has been able to leverage next-generation AI and ML across both government and commercial sectors. Because of this, the market opportunity for the company is enormous. It’s estimated at a whopping $119 billion.
Even though competition is emerging, it will take time for the rivals to gain traction against Palantir. After all, the company has the benefit of nearly two decades in developing its technologies.
So even though the valuation is far from cheap, the company is likely to see continued strong growth because of the megatrend of digital transformation.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
