Where will Palantir be in 10 years?

Big Data Software Stock Palantir (PLTR 1.95%) is having its big moment today. Sales are rising, profitability has turned positive – a rarity for a software stock – and the artificial intelligence revolution seems to be boosting demand for its platforms again.

Founded in 2003, Palantir initially supported the US military and intelligence agencies during the war on terror, but the company now appears to be evolving into a more commercially focused company. This is good news for shareholders, as the commercial market is far larger.

Commercial business was boosted

Last quarter, Palantir showed a significant acceleration in its commercial business. Commercial revenue grew 33% to $307 million, representing 45.3% of revenue. This means the company is quickly catching up with the traditional government segment, which held up well with 23% growth to $371 million. Both segments accelerated year-over-year, allowing the company to more than double its year-over-year growth rate, from 13% growth in Q2 2023 to 27% total growth in Q2 2024.

That's a pretty amazing increase in growth rate, which usually gets harder, not easier, as a company gets bigger. But behind the scenes, the future prospects for commercial revenues are even brighter, especially in the dynamic US market.

In the second quarter, US trade revenue increased 55%, but would have increased 70% without the initial low-revenue deployments to “strategic” clients. The total number of US trade clients increased 83% to 295 trade clients, up 41% year-over-year. Finally, remaining trade value (RDV), which summarizes the total residual value of all outstanding contracts, increased a whopping 103% year-over-year.

It is noteworthy that the USA now generates just over 50% of total commercial sales.

Acceleration coincides with the launch of the AI ​​Palantir (AIP) platform

In his letter to shareholders, CEO Alex Karp included the following graphic on customer acceptance:

As you can see, customer adoption seems to have been growing rapidly for about a year now – right 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 deploy them in real-world contexts to achieve tangible results. CEO Alex Karp said that AIP is disrupting or “obsoleting” companies' back-end application development processes, similar to how cloud computing has disrupted traditional enterprise tech infrastructure.

From the diagram above, it's clear that Karp and Palantir are onto something with AIP. In his letter to shareholders, Karp emphasized AIP's ability to leverage the power of large language models for actual business outcomes, and said that using LLMs without the full context of the business and AIP won't work:

Models with trillions of parameters may perfectly imitate Goethe, but without more they bring little value to the company. They were born into this world without any sense of its contours or logic, or even any notion of truth or basic facts, let alone the collective knowledge and insight into the workings of an organization of half a million people… 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 will release a new software platform called Warp Speed, built on top of AIP. Warp Speed ​​will be a back-end platform designed specifically for modern industrial manufacturing companies. “The American manufacturing operating system,” Karp called it, building on Palantir's previous experience in the military and heavy industry.

From discussions with analysts, it appears that Warp Speed ​​​​will link all elements of manufacturing, from the enterprise resource planning system (ERP) to the manufacturing execution system (MES) and the production lifecycle management system (PLM) to the programmable logic controllers (PLCs) for factory automation and the workers on the factory floor.

With Warp Speed, Palantir is tailoring AI for specific verticals in ways that have the potential to disrupt traditional enterprise software businesses—and those markets are pretty big.

A look into the coming decade

The defense segment is still important to Palantir and in some ways defines its corporate brand. However, it is very likely that the commercial segment will soon be the largest. In ten years, it will dwarf the defense business, whose potential size is rather limited.

Palantir had revenue of around $2.5 billion in the last 12 months and is also profitable according to generally accepted accounting principles (GAAP). However, at 33 times sales, the stock is also extremely expensive.

However, given the much larger private sector compared to the U.S. and related defense industries, Palantir's accelerated commercial success appears to have improved its long-term growth prospects. If the commercial segment continues to grow as it has, Palantir could have a significant impact in several segments of enterprise software. In the context of Warp Speed, for example, the ERP software market alone was worth $71 billion in 2023, but is expected to grow 14.4% through 2032, reaching $238 billion by then, according to Fortune Business Insights.

So, if Palantir remains at the forefront of AI-powered enterprise software with AIP, Warp Speed, and other potential offerings for the future, the company may well still have a lot of potential, potentially justifying its current valuation.