One of the AI darlings, software company Palantir (NYSE:PLTR), has had a solid performance this year. This performance was backed by its great potential, mainly in its integrated AI platform for commercial companies, strong leadership at the helm, and much more solid fundamentals than a few years ago. In this article, I will list three reasons why I am bullish on Palantir: its diversification beyond government contracts, its visionary leadership, and recent share repurchases.
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Palantir Is More Than Just a Government Contractor
Since its founding, Palantir has focused on government contracts and has worked with various American defense departments. Its software was primarily used for intelligence analysis, counter-terrorism, and military operations.
However, in parallel, Palantir expanded its operations into the Commercial sector on a smaller scale, launching its Foundry platform designed for commercial enterprises. In September 2020, Palantir went public on the NYSE, a move that not only provided capital for further expansion but also signaled Palantir’s commitment to growing its Commercial business.
Since then, Palantir has increased its investment in AI technologies, developing solutions that leverage machine learning and predictive analytics. This focus on AI was intended to enhance the capabilities of their platforms for both government and commercial clients. Palantir has formed strategic partnerships with major technology companies like Oracle (NYSE:ORCL) and Microsoft (NASDAQ:MSFT) to integrate its AI capabilities with their cloud services.
As part of Palantir’s strategy to achieve profitability and business growth, the company has been rapidly expanding its Artificial Intelligence Platform (AIP). AIP is optimized for generative AI technologies and provides tools and infrastructure for data storage, processing, and integration tailored to various AI applications.
In the first year since its launch, AIP has attracted more than 100 enterprise customers across diverse industries, such as railroads and defense, and closed 136 deals in Q1. This success underscores AIP’s potential to significantly enhance operational efficiency for a wide range of businesses.
According to Wedbush analyst Dan Ives, who calls Palantir the “Messi of AI,” the software company is poised to become essential in the enterprise sector, especially with the implementation of its AI capabilities. He views the AIP platform as transformational for the company.
If we look at the latest results, we can already see a shift in Palantir’s core from Government to Commercial. In Q1 2024, the Commercial segment accounted for 52% of the company’s revenues, whereas in Q1 2023, the Government segment was responsible for 55% of the company’s revenues.
Palantir Has a Visionary Leader
Having co-founded Palantir in 2004, CEO Alex Karp has played a pivotal role in transforming the company into a major player in the tech industry. Karp is known for his distinctive and unconventional leadership style, unique personal approach, bold statements, and innovative ideas.
Karp believes that every large organization worldwide will soon require a system with AI capabilities, which Palantir offers through its AIP platform.
His vision for AI differs from that of smaller AI companies that rely on chatbots and point solutions, depending on other firms to integrate their operations. Palantir, on the other hand, integrates data in one place and streamlines workflows. This comprehensive vision is something only a major disruptor can envision, and with Alex Karp at the helm, it seems likely.
Additionally, for a company involved in disruptive innovations to truly be disruptive, it needs visionary leaders who will stand up to short-term oriented shareholders and be able to execute their vision. This is also the case with Alex Karp.
Palantir Is Repurchasing Shares
Over the last nearly four years, from June 30, 2020, to March 31, 2024, Palantir has heavily diluted its shares by approximately 200%, increasing the total number of outstanding shares from 736.6 million to around 2.23 billion.
This move was prompted by its substantial share price hike in 2021, when it reached all-time highs and the necessity to raise capital to fuel growth, reduce debt, and enhance liquidity. Coupled with a more challenging macroeconomic environment over the past two years, this dilution has harmed investor confidence and impacted Palantir’s share price before the AI boom.
However, the situation has now reversed. Instead of selling equity, Palantir is repurchasing shares.
Palantir ended the first quarter with $3.90 billion in cash and equivalents, providing a strong position to execute share buybacks. During the earnings call, the company announced it had repurchased roughly 500,000 shares as part of its share repurchase program. As of the end of the quarter, about 990 million shares are still available from the initial authorization.
This share repurchase activity implies a reduction in the number of shares outstanding, typically resulting in more ownership of the company’s stock concentrated among existing shareholders.
Generally, this movement indicates that management believes the company is trading at a market value below its expectations, even with PLTR trading at a forward price-to-earnings (P/E) ratio of 77x. I believe that more buybacks can be seen in the firm’s Q2 report in early July.
Is Palantir Stock a Buy, According to Analysts?
The consensus among Wall Street analysts regarding PLTR is a Hold. This is based on three Buys, six Holds, and four Sell ratings assigned in the past three months. The average PLTR stock price target is $22.55 among 13 analysts, implying downside potential of 6.6%.
The Bottom Line
Palantir is now much more than a government contractor. It has become a pure AI play, expanding and investing in its Commercial business through its AIP platform, guided by dynamic leadership with the potential to be disruptive.
Although there is a lot of hype around its stock, which is likely already well-priced into its valuation, the company seems to be in the early stages of realizing its AI potential. The repurchasing of shares indicates that there is upside potential for Palantir, at least in the long term.
