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Down 25% From Its High, Is Palantir Stock a Smart Buy?

Palantir Technologies (NYSE: PLTR) has quite the backstory. Often referred to as Silicon Valley's most secretive start-up, the company started by building software for the U.S. intelligence community. In fact, the Pentagon and CIA deployed Palantir's Gotham platform in Iraq and Afghanistan, where it allegedly played a role in helping the government locate Osama bin Laden.

Somewhat fittingly, Palantir is named after a magical artifact from The Lord of the Rings, an indestructible and all-seeing crystal ball. Despite this fantastical namesake, the stock has taken a hit recently, and the share price currently sits 30% below its all-time high. At this discounted price, is Palantir a smart buy? Let's dive in.

Image source: Getty Images

Market opportunity

Palantir is a software company with two different customer-facing platforms: Gotham and Foundry. The former is designed for government agencies, especially those in the defense and intelligence sectors; the latter was built for commercial companies, and it has seen adoption across more than 40 industries.

In both cases, Palantir's software helps clients integrate and analyze siloed data sets. This allows data scientists to build AI models and applications, and it empowers leaders to make data-driven decisions. For instance, manufacturers like Airbus use Foundry to optimize supply chains, and utilities companies like PG&E use it to manage inventory and power grids.

In short, Palantir helps its clients make sense of big data, then use that information to take the appropriate action. To that end, management puts its market opportunity at $119 billion, which includes $63 billion in the government sector and $56 billion in the commercial sector.

Competitive position

Palantir is more than a data analytics engine. Its platform also helps clients secure and control access to data, as well as track the way that data is used. And if Palantir's past is any indicator, the company has a knack for safeguarding sensitive information.

Case in point: The Gotham platform was secure enough to handle national secrets, a credential few other companies can boast. And if Palantir met the security standards of the CIA and the Pentagon, it seems unlikely that any organization in the commercial sector would take issue.

But Palantir also has another advantage. Its third platform -- Apollo -- gives the company an edge over most software-as-a-service (SaaS) vendors. Apollo is a continuous delivery system designed to keep Gotham and Foundry updated at all times. It also allows Gotham and Foundry to run in atypical environments. Whereas most SaaS products can only be deployed in the public cloud, Palantir's SaaS can be deployed across public clouds, private data centers, and even classified networks. This gives the company an edge in highly regulated industries.

For instance, healthcare institutions and financial service providers cannot store certain data in the public cloud (e.g. patient- or client-specific information), meaning these companies may be unable to use traditional SaaS products. But they can deploy Palantir's software on-site, where the Apollo platform can still provide all the benefits of a SaaS business model.

Financial performance

Digital transformation has sparked an explosion in new technologies, and modern enterprises are generating data at an incredible pace. Companies that can harness that data and unlock its value stand to gain an advantage over their peers. And that's exactly why Palantir exists.

Not surprisingly, the company has posted solid top-line growth during its short tenure as a public company. And although it's not profitable on a generally accepted accounting principles (GAAP) basis, it did generate $61.7 million in free cash flow over the trailing 12 months, evidencing the sustainability of its business model.

Metric

Q2 2020 (TTM)

Q2 2021 (TTM)

Change

Customers

137

169

23%

Revenue

$901.1 million

$1.3 billion

47%

Source: Palantir SEC Filings, YCharts. TTM = trailing 12 months.

Currently, the biggest red flag is Palantir's customer count, which remains relatively low. In turn, the average revenue per customer sits at $7.9 million, and while no single customer accounts for more than 10% of revenue, that figure is still fairly high. In other words, the loss of even a few customers could spell trouble for Palantir.

However, things appear to be moving in the right direction. During the most recent quarter, revenue grew 49%. Palantir also closed 62 deals worth $1 million or more, and the company grew its commercial customers by 61% through the first half of 2021.

The bottom line

Palantir stock currently trades at a pricey 31 times sales; but the company has established a strong brand and a solid competitive position, and it benefits from a massive market opportunity. Despite Palantir's low customer count and relatively concentrated revenue, management is executing on a strong growth strategy. From that perspective, I think this stock is a worthwhile long-term investment.

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Trevor Jennewine owns shares of Palantir Technologies Inc. The Motley Fool owns shares of and recommends Palantir Technologies Inc. The Motley Fool has a disclosure policy.


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