The “Magnificent 7” dominates the conversation around investing in AI. But could this under-the-radar company be a sleeper hit? I recently decided to explore Palantir more thoroughly as a company and investment opportunity. In this article, I’ll share my thesis on Palantir as well as my research process for individual stocks.
Palantir is a somewhat secretive firm that has been around since 2003, founded by Peter Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen, and Alex Karp. Palantir's business model involves functioning as an operating system. They assist their government and enterprise clients in interacting effectively with big data analytics and LLMs.
Palantir offers three main products; Gotham, Foundry, and Apollo.
“Gotham” is primarily used by government agencies for intelligence and defense operations.
“Foundry” is aimed at commercial clients, providing data integration and analysis.
“Apollo” is a continuous delivery system that manages and deploys Palantir's software.
Palantir also employs forward deploy engineers for a high-touch approach that enables tailored solutions. The company typically seeks multi-year contracts for stable, recurring revenue.
I have a bit of personal history following Palantir from back in the days when they were still a pre-IPO private company. The same winter when I was interviewing for investment banking jobs and doing a write-up on Nvidia, I actually did a similar one for Palantir.
Back then, “big data” was the buzzword, and Palantir was doing a lot of cool stuff at the forefront of it with the government. For instance, Palantir’s technology was used to coordinate disaster response efforts after Hurricane Sandy hit the East Coast in 2012.
It was really fascinating to me that Palantir was able to pull off combining cutting-edge tech with high-stakes problems within government like disaster relief and national security. Plus, I was a big Lord of the Rings fan and couldn’t help but be drawn to its reference to the Palantir crystal balls that were used by Saruman.
My fascination with Palantir actually led me to interview with them back in 2015 when I was looking for a move out of Amazon, my first job. Although I never did end up working there since I got my offer at Google first, and, the rest is history.
Since then, Palantir has IPO-ed in 2020, moved beyond just government contracts and moved into the private sector, played a role utilizing the technology for COVID-19 efforts. The Foundry platform was used by the US government in managing distribution of critical medical supplies, and it’s data models were used to create simulation models for virus spreads).
The company is not without its controversies and secrecies surrounding their operations, especially the highly sensitive nature of some of its work. Palantir's involvement in government work has also raised privacy concerns, particularly regarding the handling of sensitive health data.
So why am I interested in Palantir again as a company and as an investment opportunity within the AI narrative?
In general, when I look at investing in an individual stock, here are the main questions I ask:
Do I believe in the broader segment that the company is poised in?
Do I believe that there is huge amounts of value in the specific part of the industry as well?
Do I believe that this company has a competitive advantage to be a leader and execute on this?
Here is why I think Palantir is an interesting company to look at, based on those questions and my subsequent analysis:
AI Value Chain: AI is right now in the “picks and shovels” infrastructure stage, which is why companies like Nvidia are hugely profiting off of it. However, as AI moves down the value chain the deployment and operational management of AI and large language models (LLMs), Palantir would be incredibly well-positioned to be the go-to operating system for enterprises and government entities looking to leverage AI and LLMs. The company's credibility and extensive background in high-stakes environments since the early 2000s, such as government operations, give it a unique edge.
Product advantage: Palantir distinguishes itself from competitors like Databricks and Snowflake by offering a comprehensive data operating system with built-in government and security features from day one. In other words, helping these organizations “do data science easier.” Now, of course, I had to do my due diligence by looking at the comments and feedback around the product for the actual industry practitioners and customers to see what the product is all about. Data engineers have mixed reviews about Palantir. However, for a specific customer profile that requires security and custom code, and possibly lacks an internal IT department capable of building such solutions, Palantir appears to be quite useful. And that is reflected within its net dollar retention number of 108%, indicating high customer satisfaction and competitive advantage.
Comment #1
Comment #2
Comment #3
Growth Story: Forecasts show that Palantir’s revenue will grow at 16% for the next year, driven by their continuous work with the government but also expansion with new customers in the commercial sector. Palantir’s customer count increased in Q1 42% and commerical revenue went up 27%. Palantir’s platform has been helping large enterprises integrate AI effectively. For example, General Mills saves $14 million annually through a partial deployment of Palantir’s platform.
Financial Position: Palantir has strong customer growth, no debt exposure, and relatively stable revenue within the government sector. Palantir only recently became profitable in the 4th quarter of 2022, and is currently at 12% profit margin. While Palantir might not show the runaway growth that we’ve seen from Nvidia - especially with Palantir’s long sales cycles with enterprises - it is well-positioned for sustained growth, offering a "slow burn" investment with the potential for substantial returns over time.
So the questions you have to ask yourself to see if you want to invest in Palantir are the below:
Do I believe in the broader segment that the company is poised in - in this case, AI?
Do I believe that there is huge amounts of value in the specific part of the industry as well - down the value chain deployment of AI for enterprises and government?
Do I believe that this company has a competitive advantage to be a leader and execute on this? - Palantir and its a) focus on doing the end-to-end operating system, b) compounded experience in working with these specific customers.
And for all of these, I believe these to be true, which I think is what makes Palantir is a good potential sleeper-hit investment. It could be a potential trillion-dollar company that is not a trillion-dollar company today. It’s poised well in the AI and data analytics space, specifically with its operating system approach with a specific enterprise and government clientele where it has advantages.
How am I investing?
I am investing a small portion of my portfolio into Palantir, starting out with 0.5%, which I am looking to potentially increase to up to 2-3%.
This approach is similar to how I began my investments in high-potential companies like Tesla back in the day in 2015 - I invested a small portion of my portfolio to see if it could deliver 10x returns in 10 years.
Do you think Palantir will be part of the AI growth narrative?