1 Solid AI Stock to Watch in H2 2024 That Isn’t Nvidia

Artificial intelligence (AI) is undoubtedly one of the biggest trends of our generation, potentially rivaling (some would say even surpassing) that of the internet.

The development of AI would take many companies to new heights, while some would be brought to the brink of extinction. For example, Nvidialeading supplier of graphics processing units (GPUs) for AI computing, saw its market capitalization briefly exceeded Microsoft become the most valuable company in the world and then fall slightly to second place.

While Nvidia is an obvious candidate, investors looking to invest in the AI ​​trend shouldn’t put all their eggs in one basket. Fortunately, the AI ​​tailwind should benefit a number of other companies besides Nvidia — and one of them is Palantyr (PLTR 2.17%).

Palantir has a sticky business model

If you were asked to name a top tech company, Palantir probably wouldn’t be your best choice—and for good reason. It’s not a consumer tech company like Amazon Or Alphabet, or a small to medium sized software company such as Online shopPalantir’s primary customers are large organizations, mainly governments and large corporations.

Founded in 2003, Palantir initially focused on creating software for the U.S. government in counterterrorism operations. Its early success led to further expansion of its products to other governments around the world. The company entered the commercial market at a later stage, leveraging its expertise and experience gained from serving government customers.

Palantir’s value proposition for its customers (most of whom are still governments) is relatively simple (if not easy to realize). It helps them collect massive amounts of data from everywhere (internally and externally), analyze the data using a software platform, and make critical operational decisions. Palantir’s software tools must be robust, scalable, and reliable because they help customers make critical decisions—some of which are matters of life and death.

In addition, Palantir must tailor its software to the needs of its customers. For example, a local government agency will have very different requirements than the Department of Defense. So while Palantir can leverage a common software platform and experience, it must tailor its solutions to help different customers implement their respective operations.

For these reasons, Palantir products can be very sticky with customers. The huge financial and human resources required to implement this software—such as installation, integration, and training—create huge switching costs for customers. As long as the software works, there is no point in considering changing vendors.

In addition, Palantir typically enters into long-term contracts with customers, which further improves revenue stickiness. As of December 31, 2023, existing contracts have a duration of 3.4 years, compared with 2.8 years the previous year. In addition, existing customers tend to spend more money with Palantir over time. For example, the 20 largest customers paid an average of $54.6 million in 2023, up 11% from $49.4 million the previous year.

Artificial Intelligence to Power Palantir’s Business in 2024 and Beyond

Palantir’s early track record of helping the U.S. government is a great springboard for building a huge business around government agencies. While impressive, this segment is unlikely to take Palantir to the next level. Instead, the software company needs to grow its commercial segment.

By comparison, 55% of Palantir’s revenue in 2023 came from the government segment, with the remaining 45% coming from the commercial sector (compared to 44% in 2020). Here’s the challenge: Palantir’s ability to rapidly further scale its commercial segment.

Don’t get me wrong. There’s nothing wrong with having a significant and solid government business, especially since many of those relationships are incredibly sticky. But Palantir’s greatest opportunity lies in the commercial segment.

And this is where AI will play a significant role in shaping Palantir’s next phase of growth. In particular, the rise in AI awareness, especially with the proliferation of generative AI applications like ChatGPT from 2023, has given the market a taste of what AI can do to their work and personal lives. This awareness increases the urgency for companies to adopt the latest AI tools to improve their business or risk losing out to competitors.

Palantir has multiple ways to win. One is by leveraging existing customer relationships to upsell AI solutions. This approach will be the easiest because customers have invested heavily in using the Palantir platform, so they can quickly launch new AI models using their existing data infrastructure.

In addition, Palantir can leverage short-term market excitement to attract new customers. To that end, Palantir is using its AIP Bootcamps to let potential customers try out its AI platform for free, giving them a real taste of how AI can improve their business. This allows customers to see exactly what they can get from the software without paying anything upfront, which should improve conversion rates.

While it’s still early days, there are already tangible signs that AI could be transformative for Palantir. For example, Palantir’s U.S. commercial revenue grew 40% year over year in Q1 2024, and the number of closed U.S. commercial deals increased 94% year over year. By comparison, company-wide revenue grew just 21%. What’s more, this trend could continue for years to come.

What does this mean for investors?

Investors are constantly looking for the next megatrends that can shape society and generate enormous wealth over the long term.

That’s how Amazon, a young upstart from nowhere in the 1990s, became one of the most valuable companies in the world by riding on the Internet’s tailwinds. That same tailwind led to the rise of tech companies like Alphabet and Meta Platform.

Likewise, AI will undoubtedly create new tech giants. Investors should therefore keep a watchlist of potential winners. Palantir should be on that watchlist.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, chief executive officer of Alphabet, is a member of The Motley Fool’s board of directors. Lawrence Nga has no ownership interest in any of the stocks mentioned. The Motley Fool owns shares in and recommends Alphabet, Amazon, Microsoft, Nvidia, Palantir Technologies, and Shopify. The Motley Fool recommends the following options: long January 2026 $395 call options on Microsoft and short January 2026 $405 call options on Microsoft. The Motley Fool has a disclosure policy.