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Data analytics firm Palantir Technologies (NYSE: PLTR) is one of the new shiny things in the so-called new technologies space. The company went public via a direct listing on Sept. 30. Since making its debut, PLTR stock is up by over 250%.
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Year-to-date, shares of Palantir are up by roughly 37%. You probably want to know if there’s still a significant upside potential here that makes PLTR stock worth buying for the long haul.
The best starting point is understanding the reason for the excitement around Palantir.
The Denver-based company has been around since 2004 and generates a larger portion of its revenue from (mainly United States) government customers. For the third quarter of 2020, the company reported a $163 million (representing a 68% year-over-year growth) revenue from government customers. That’s roughly 56% of the $290 million revenue for the quarter.
Palantir’s commercial revenue (i.e., revenue from enterprise customers) was $127 million, growing by 35% vs. Q3 2019.
So why are investors excited about PLTR stock?
Surge in Government Spending on Data Analytics Benefits PLTR Stock
Palantir has been one of the few companies that have genuinely grown during the pandemic. That’s, in part, thanks to the pandemic-driven surge in the demand for AI-supported healthcare data analytics. Expectations are that the demand for health data analytics will continue to surge, a trend from which Palantir is set to benefit.
During the company’s Q3 earnings call, Chief Operating Officer Shyam Sankar said:
Honestly, there’s been enormous acceleration for a part of a business that was pretty small 18 months ago in health care. We’re seeing opportunities for large systemic transformation in health care in the U.S. but also abroad, COVID-exposed opportunities for improvement, and I think governments are going to invest there.
The company said its work with health agencies has accelerated over the past year, as they secured a $36 million contract from NIH’s National Center for Advancing Translational Sciences.
It’s worth mentioning that most of Palantir’s government revenue has been from the defense department. COVID-19 has helped the company diversify its government customer base.
Increase in Staple of Enterprise Customers
In a bid to compete in the enterprise data market Palantir has been pushing its Foundry product. The enterprise market typically has a higher ceiling in terms of market worth compared to the government market. Indeed, there’s been growth — again due, in part, to COVID-19. But the company is having to refine its strategy to reach a larger enterprise market.
Palantir’s products, which used to be mainly targeted at deep-pocketed entities, are now being broken into less-pricey modules that not so deep-pocketed companies can use.
The company’s recent partnership with International Business Machines (NYSE:IBM) is a move in that direction. Rob Thomas, IBM’s senior vice president of software, cloud, and data, expects the partnership to increase the proportion of its customers using AI to 80%. Only 20% of IBM’s customers currently use AI. That would represent a low-cost significant customer acquisition for Palantir.
Does That Make Palantir Stock a Buy?
It’s not so simple to call.
On the one hand, Palantir will surely benefit from the network effect of partnerships, such as the one with IBM, to grow its commercial business at a low cost. One problem, however, is that it’s too early to say just how successful the commercial push would be. It’s more difficult to put a timeline on it. And it appears that the only justification for Palantir’s lofty valuation is the potential growth from its commercial business. Without the commercial business angle, Palantir is just another IT-focused government contractor. And compared to other government contractors, PLTR stock is pricier by a wide margin.
To be clear, I believe the commercial business story is a good thesis for buying PLTR stock. I would, however, monitor the company for a few more quarters to get a sense of the progress in its commercial business efforts.
On the date of publication, Craig Adeyanju did not have (either directly or indirectly) any positions in the securities mentioned in this article.