Big data software inventory Palantir (NYSE: PLTR) is having a moment today. Revenue is rising, profitability has turned positive — a rarity for a software stock — and the artificial intelligence revolution appears to be reviving demand for its platforms.
Palantir was founded in 2003 and started out assisting the U.S. military and intelligence agencies during the War on Terror. But the company now appears to be transitioning to a more commercially oriented company. That’s good news for shareholders, as the commercial market is much larger.
Commercial business has started
Palantir saw a marked acceleration in its commercial business in the quarter. Commercial revenue grew 33% to $307 million, accounting for 45.3% of revenue. That’s rapid growth in the traditional government segment, which held its own with a nice 23% growth to $371 million. Both segments accelerated versus last year, allowing the company to more than double its growth rate versus the year-ago quarter, from 13% growth in Q2 2023 to 27% total growth in Q2 2024.
That’s a pretty staggering increase in the growth rate, which typically gets harder, not easier, as a company gets bigger. But under the hood, things look even brighter in the outlook for commercial revenues, particularly the dynamic U.S. market.
In Q2, US commercial revenue grew 55%, but would have grown 70% had it not been for the discounting of low-revenue initial deployments to “strategic” customers. Total US commercial customers grew 83% to 295 commercial customers, with total customer numbers up 41% year-over-year. Finally, US residual deal value (RDV), which includes all remaining value of outstanding contracts, grew a whopping 103% year-over-year.
It is striking that the US now accounts for just over 50% of total commercial revenues.
Acceleration coincides with unveiling of AI Palantir (AIP) platform
In his letter to shareholders, CEO Alex Karp included this chart on customer adoption:
As you can see, there seems to have been a big acceleration in customer adoption starting about a year ago — right around when Palantir launched its AIP platform. AIP is Palantir’s artificial intelligence software that helps companies harness the power of large language models (LLMs) and apply them in real-world contexts so that companies can generate tangible results. CEO Alex Karp said that AIP is disrupting, or “deprecating,” companies’ back-end application development processes, similar to the way cloud computing disrupted companies’ traditional technology infrastructure.
As the chart above shows, Karp and Palantir are onto something with AIP. In his letter to shareholders, Karp emphasized AIP’s ability to harness the power of large language models for real business results, and said that using LLMs without the full context of the company and AIP won’t work:
Models with trillions of parameters may be able to emulate Goethe flawlessly, but without more they add little value to the enterprise. They are born into this world without any sense of contours or logic, or even a concept of truth or basic facts, let alone the collective knowledge and understanding of the operations of an organization with half a million employees… They are wild animals, whose power and capabilities must be tamed and harnessed. And we are now seeing what is possible when they are.
AIP also leads to new vertical products
But the growth doesn’t stop there. Karp and his team also noted that Palantir would be launching a new software platform called Warp Speed, built on AIP. Warp Speed will be a back-end platform designed specifically for modern industrial manufacturing companies. “The American Manufacturing Operating System,” Karp called it, built on Palantir’s previous experience in the military and heavy industrial industries.
From the analyst conversation, Warp Speed connects all elements of manufacturing, from the enterprise resource planning (ERP) system, the manufacturing execution system (MES), the production lifecycle management (PLM) system, the programmable logic controllers (PLCs) for factory automation, and the workers on the factory floor.
With Warp Speed, Palantir is applying AI to specific vertical industries in a way that has the potential to transform traditional enterprise software companies. And those markets are pretty big.
A look at the next decade
The defense segment is still important to Palantir and somewhat defines the company brand. However, it is very likely that the commercial segment will soon become the largest. In ten years, it will eclipse the defense industry, which is somewhat limited in its potential size.
Palantir generated about $2.5 billion in revenue over the past 12 months, but it’s also profitable based on generally accepted accounting principles (GAAP). Still, the stock is also extremely expensive at 33 times sales.
But given the much larger private sector relative to the U.S. and allied defense industries, Palantir’s accelerated commercial traction appears to have improved its long-term growth prospects. If the commercial segment continues to grow as it is, Palantir could make a significant dent in several segments of enterprise software. For example, in the context of Warp Speed, the ERP software market alone was worth $71 billion in 2023, but is expected to grow at a rate of 14.4% through 2032, reaching $238 billion by then, according to Fortune Business Insights.
So if Palantir continues to lead the way in AI-driven enterprise software with AIP, Warp Speed, and other potential future offerings, the company may have a lot of potential left in it, which could justify its current valuation.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Where Will Palantir Be in 10 Years? was originally published by The Motley Fool
