Artificial intelligence (AI) is undoubtedly one of the biggest trends of our generation, one that could rival (and even surpass, according to some) that of the Internet.
The rise of AI would enable many companies to reach new heights, while sending some to the brink of extinction. For example, Nvidiaone of the leading suppliers of graphics processing units (GPUs) for AI computing, saw its market capitalization briefly exceed Microsoft become the world’s most valuable company before slipping slightly to second place.
While Nvidia is an obvious contender, investors looking to invest in the AI ​​trend shouldn’t put all their eggs in one basket. Fortunately, the AI ​​tailwind should benefit many other companies beyond Nvidia — and one of them is Palantir (NYSE:PLTR).
Palantir has a sticky business model
If someone were asked to name a top tech company, Palantir probably wouldn’t be the first choice – and for good reason. It’s not a consumer technology company like Amazon Or Alphabet, or a small or medium sized enterprise oriented software company like ShopifyPalantir’s primary customers are large organizations, primarily governments and large enterprises.
Founded in 2003, Palantir initially focused on creating software for the U.S. government in counterterrorism operations. Its early success led to further expansion of its products to other governments around the world. The company later entered the commercial market, leveraging its expertise and experience serving government clients.
Palantir’s value proposition to customers (the majority of whom are still governments) is relatively simple (but not at all easy to implement). It helps them collect vast volumes of data from anywhere (internal and external), analyze it with its software platform and make critical operational decisions. Palantir’s software tools must be robust, scalable and reliable as they help customers make critical decisions, some of which are matters of life and death.
Palantir also needs to tailor its software to the needs of its customers. For example, a local government agency will have completely different requirements than the Department of Defense. So while Palantir can leverage its common software platform and experience, it must tailor its solutions to help different customers manage their respective operations.
For these reasons, Palantir’s products can be very sticky with its customers. The enormous financial and human resources required to implement this software (such as installation, integration, and training) create a huge switching cost for customers. As long as the software continues to work, it doesn’t make sense to consider changing providers.
Additionally, Palantir typically enters into long-term contracts with its customers, further enhancing its revenue stability. As of December 31, 2023, existing contracts are 3.4 years long, up from 2.8 years a year earlier. Additionally, existing customers typically spend more money with Palantir over time. For example, the top 20 customers paid an average of $54.6 million in 2023, up 11% from $49.4 million a year earlier.
AI Expected to Power Palantir’s Business in 2024 and Beyond
Palantir’s early results with the US government provide an excellent springboard for building a large-scale business around government agencies. While impressive, this segment probably won’t take Palantir to the next level. Instead, the software company must develop its commercial segment.
To put things in perspective, 55% of Palantir’s revenue in 2023 came from the government segment, with the remaining 45% coming from the commercial sector (up from 44% in 2020). Therein lies a challenge: Palantir’s ability to rapidly grow its commercial segment.
Do not mistake yourself. There’s nothing wrong with having big, strong government activity, especially since many of these relationships are incredibly strained. However, Palantir’s biggest opportunities lie in the commercial segment.
And it’s there AI will play an important role in defining Palantir’s next phase of growth. In particular, the increased awareness of AI, especially with the proliferation of Generative AI Applications like ChatGPT since 2023 have given the market a taste of what AI can do for their work and personal lives. This awareness reinforces the urgency for businesses to implement the latest AI tools to improve their operations or risk losing to their competitors.
Palantir has several ways to win. The first is that it can leverage its existing customer relationships to sell its AI solutions. This approach will be the easiest since customers have invested heavily in using Palantir’s platform, so they can quickly run new AI models by leveraging existing data infrastructure.
On top of that, Palantir can leverage short-term market enthusiasm to recruit new customers. To this end, Palantir leverages its AIP Bootcamps to allow potential customers to try its AI platform for free, giving them a real insight into how AI can improve their business operations. This way, customers can see exactly what they can get out of the software without paying anything up front, which should improve conversion rates.
Although it’s still early, there are already tangible signs that AI could be transformative for Palantir. For example, Palantir’s U.S. commercial revenues jumped 40% year-over-year in the first quarter of 2024, and U.S. commercial deals jumped 94% year-over-year. In comparison, the company’s revenue grew only 21%. Better yet, this trend could continue for many years.
What this means for investors
Investors are constantly looking for the next megatrend that could shape society and generate enormous wealth over long periods of time.
This is how Amazon, a young start-up born out of nowhere in the 1990s, became one of the most profitable companies on the planet by capitalizing on the Internet tailwind. This same tailwind has led to the rise of tech companies like Alphabet and Meta-platform.
Similarly, AI would undoubtedly create new tech giants, so investors should keep a watch list of potential winners. Palantir should be on that list.
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John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Laurent Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, Nvidia, Palantir Technologies, and Shopify. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
1 Solid AI Stock That Isn’t Nvidia To Watch In H2 2024 was originally published by The Motley Fool
