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Could Palantir Become the Next Microsoft?

Motley Fool - Thu Nov 30, 2023

Palantir Technologies(NYSE: PLTR) has been a divisive stock ever since the company went public via a direct listing in September 2020. The data mining and analytics company started trading at $10 per share, skyrocketed to an all-time high of $39 during the buying frenzy in growth and meme stocks in January 2021, then retreated to about $19.

The bulls praised Palantir's established business with the U.S. government, where its Gotham platform gathers intel for the military and various agencies. They also believed it could leverage that battle-hardened reputation to expand the adoption of its Foundry platform by large commercial customers. The bears argued that Palantir's dependence on government contracts limited its long-term growth, it faced too many competitors in the commercial market, and its stock was too expensive.

A soldier uses a laptop on the field.

Image source: Getty Images.

Palantir's stock will likely remain volatile over the next few years, but could it eventually expand and evolve into a megacap software giant like Microsoft?

Palantir isn't a new company

Palantir only went public three years ago, but it was founded 20 years ago by Peter Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen, and current CEO Alex Karp. The CIA's venture capital arm, In-Q-Tel, was one of its earliest investors.

Palantir was named after the all-seeing crystal balls from The Lord of the Rings, and it was founded to address some of the issues that led to the U.S. government's intelligence failures ahead of the terrorist attacks of Sept. 11, 2001. Its Gotham platform aggregates data from disparate sources to create profiles of individuals, organizations, or various trends.

Palantir initially operated behind the scenes, but it gained a lot of attention after its technology was reportedly used to help track down Osama Bin Laden in 2011. It gained even more public attention as Immigration and Customs Enforcement (ICE) used its platform to track down and deport undocumented immigrants under the Trump administration.

Palantir's growth is slowing down

Palantir's revenue rose 47% in 2020 and 41% in 2021, and it initially forecast that it could grow its revenue annually by at least 30% through 2025. But its revenue only grew 24% in 2022, and management now expects just 16% growth in 2023.

That flagging growth was caused by two main challenges. First, the uneven timing of its government contracts throttled Gotham's growth. Second, Foundry's growth cooled off as the macroeconomic headwinds led companies to rein in their software spending.

But on the bright side, Palantir's year-over-year revenue growth finally accelerated again in the third quarter, and management expects that acceleration to continue in the fourth quarter. It's also stayed profitable on a generally accepted accounting principles (GAAP) basis over the past four quarters as it reduced its stock-based compensation expenses.

Can Palantir evolve into a megacap company like Microsoft?

The bulls believe Palantir's growth will accelerate again as escalating geopolitical tensions induce the U.S. government to upgrade its data mining capabilities. They also believe that large companies' growing needs for efficient data processing tools -- especially in the energy, aerospace, and industrial markets -- will drive Foundry's expansion.

In addition, Palantir recently launched a new artificial intelligence (AI) platform that will make it easier for its clients to build AI apps and analyze large language models. Those new features could tether the company to the long-term growth of the global AI market, which Precedence Research expects to expand at a compound annual rate of 19% from 2023 to 2032. If Palantir merely keeps pace with that market, its annual revenue could grow from $2.2 billion in 2023 to $10.5 billion in 2032.

If Palantir is still trading at 20 times sales by then, it could cross the $200 billion threshold for becoming a megacap company. But it would still be much smaller than Microsoft, which currently has a market cap of $2.8 trillion.

Yet several challenges could still throttle Palantir's growth over the next decade. ICE has been internally developing its own data mining platform to replace Gotham, and other U.S. government agencies could follow that example. Foundry could also struggle to keep pace with other enterprise-oriented data mining services like Alteryx, Splunk, and Salesforce . To break out of its niche and become a megacap company that would truly merit being called the "next Microsoft," Palantir will need to make some big acquisitions and expand its ecosystem.

Palantir will remain a polarizing stock

Palantir might eventually evolve into a megacap tech giant in the future. But for now, investors should focus on its ability to accelerate its revenue growth, maintain its GAAP profits, and justify its premium valuation in this challenging market. If it can't check all three of those boxes, its stock could drop much lower before it revisits its all-time high.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alteryx, Microsoft, Palantir Technologies, Salesforce, and Splunk. The Motley Fool has a disclosure policy.

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