Palantir (NYSE:PLTR), which is a leading analytics company, pulled off its IPO in late September. On the first-day of trading, the shares jumped by 31%. But this was not the end of the gains. Palantir stock would go on to end the year up about 224%.
Part of this was due to the overall bull move with tech stocks. But Palantir also got a boost from its better-than-expected fourth quarter report. Revenues spiked by 52% to $289.4 million and the company raised its full-year guidance to $1.070 billion to $1.072 billion, up 44% on a year-over-year basis.
Despite all this, there remains skepticism on Wall Street. The big concern: it’s the valuation. Consider that the stock trades at about 40 times sales! The market capitalization is at about $44.2 billion.
For example, Morgan Stanley analyst Keith Weiss recently issued a downgrade of the company’s shares, with a price target at $13. There were also other negative reports from Citigroup (NYSE:C) and Credit Suisse (NYSE:CS).
Now I’ve been bullish on Palantir stock since its IPO. But given the bull run, it seems like it will be more difficult to churn out huge returns. Yet I still think next year could be positive for investors.
Why so? Let’s take a look at three reasons:
Unique Company
Palantir stock got its start back in 2003. The company was essentially a response to the rise of global terrorism.
Cofounder Peter Thiel – who was also the first outside investor in Facebook (NASDAQ:FB) and the cofounder of PayPal (NASDAQ:PYPL) – believed that sophisticated analytics and machine learning could detect potential threats. It was about finding the “needle in the haystack.”
The initial work for Palantir came from governmental agencies like the Department of Defense and the Central Intelligence Agency (CIA). While much of the work is confidential, there is buzz that the company was able to find various notorious terrorists, including Osama bin Laden.
But there was an nagging issue with Palantir – that is, the work was highly labor intensive. So the company started to build its own platforms and systems. The result was the development of Gotham for defense work and Foundry for commercial purposes. This has set Palantir apart from other large defense contractors and computer consultant operators – and has been key to the growth story.
Market Opportunity
The addressable market for Palantir is massive. According to its own estimates, its at about $119 billion – which is for both government and commercial sectors.
Let’s face it, all large organizations need modernization and better use of their datasets. But it can be extremely difficult to do this internally or with outside experts. The projects can be costly and time-consuming because of the legacy technologies and the data silos. As a result, it is not uncommon for the projects to fail to produce adequate results.
The advantage for Palantir is that it has an extensive track record of taking on complex projects and getting strong results.
Strategic
A typical contract for Palantir is multi-year and involves millions of dollars. In the commercial sector, a client’s revenues are usually more than $500 million (there are 6,000 companies in the world that meet this criteria).
The good news is that Palantir has shown great success in winning bids. There is also a strong renewal rate. A recent example is the U.S. Army’s Program Executive Office for Enterprise Information Systems. The organization recently agreed to a renewal for $113.8 million for one year (the initial contract was for $458 million).
Then again, Palantir technology and services have proven to generate substantial ROI (Return On Investment). An example is a a major energy supplier that was able to implement its software and generate $57 million in cash savings in a few weeks. In fact, the expectation is for $1 billion on an annual basis.
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.
