Where will Palantir be in 10 years?

Stock Big Data Software Palantir (PLTR 1.95%) has a moment today. Revenue is accelerating, profitability has turned positive — somewhat of a rarity for a software stock — and the AI ​​revolution appears to be reviving demand in its platforms.

Founded in 2003, Palantir began assisting the US military and intelligence agencies during the War on Terror. But the company seems to be transitioning to become more of a commercially oriented company now. That’s good news for shareholders because the commercial market is much bigger.

The commercial business was started

Last quarter, Palantir saw a marked acceleration in its commercial business. Commercial revenue increased 33% to $307 million, representing 45.3% of revenue. This is quickly gaining on the traditional government segment, which maintained a fine growth of 23% to $371 million. Both segments accelerated year-over-year, allowing the company to double its growth rate from the prior-year quarter, from 13% growth in Q2 2023 to a total of 27% 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 under the hood, things are looking even better from a commercial revenue perspective, especially in the buoyant US market.

In Q2, US commercial revenue increased 55%, but would have increased 70% if not for the reduction in low-revenue initial deployments with “strategic” customers. Total US commercial customers increased 83% to 295 commercial customers, total customers increased 41% year-over-year. Finally, the remaining commercial value of transactions (RDV), which totals all the remaining value of outstanding contracts, increased by 103% compared to the previous year.

Of note, the US now accounts for just over 50% of total trade revenue.

The acceleration coincides with the launch of Palantir’s AI Platform (AIP).

In his letter to shareholders, CEO Alex Karp included this chart about customer adoption:

Image source: Getty Images.

As you can see, there seems to be a big acceleration in customer adoption starting about a year ago — right around the time Palantir launched its AIP platform. AIP is Palantir’s artificial intelligence software that helps companies harness the power of large linguistic models (LLMs) and use them in real-world business contexts to drive tangible results. CEO Alex Karp said AIP disrupts or “degrades” enterprise back-end application development processes, similar to how cloud computing has disrupted traditional enterprise technology infrastructure.

From the looks of the chart above, it looks like Karp and Palantir are on to something with AIP. In his letter to shareholders, Karp highlighted AIP’s ability to harness the power of large language models toward real business results, saying that using LLMs without the full context of business and AIP won’t work:

Models with trillions of parameters may be able to perfectly imitate Goethe, but without more, they add little value to the enterprise. They were born into this world with no sense of its contours or logic, or indeed any conception of truth or basic facts, much less the collective knowledge and understanding of the operations of an organization of half a million employees. … They are wild animals, whose power and capabilities must be tamed and harnessed. And now we see what is possible once they are.

AIP also leads to new product verticals

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 AIP. Warp Speed ​​will be a back-end platform purpose-built for modern industrial manufacturing enterprises. The “American manufacturing operating system” is what Karp called it, built from Palantir’s past experience in the military and heavy industrial industries.

From the call with analysts, it appears that Warp Speed ​​will tie all elements of manufacturing together, from the enterprise resource planning (ERP) system, to the manufacturing execution system (MES), to the life cycle management system of (PLM), to Programmable Logic Controllers (PLCs) for factory automation, to workers on the factory floor.

With Warp Speed, Palantir is adapting artificial intelligence for specific industry verticals in a way that has the potential to disrupt legacy enterprise software businesses — and those markets are pretty big.

Looking into the next decade

The defense segment is another important one for Palantir and somewhat defines its corporate brand. However, it is very likely that the commercial segment will soon become the largest. After ten years, it amounts to minus the defense business, which is somewhat limited in potential size.

Palantir made about $2.5 billion in revenue over the past 12 months, but is also profitable on a generally accepted accounting principles (GAAP) basis. However, at 33 times sales, the stock is also extremely expensive.

But with the private sector much larger than the U.S. and allied defense industries, Palantir’s accelerated commercial traction appears to have brightened its long-term growth prospects. If the commercial segment continues to grow as it is, Palantir could make considerable inroads into several enterprise software segments. For example, in Warp Speed ​​context, the ERP software market alone was $71 billion in 2023, but is projected to grow at a rate of 14.4% by 2032 to reach $238 billion until that time, according Fortune Business Insights.

So if Palantir stays on the cutting edge of AI-based enterprise software with AIP, Warp Speed, and other potential future offerings, it could very well have a lot of runway ahead of it, which could justify the current assessment.