Where will Palantir be in 10 years?

Big Data Software Palantyr (PLTR 1.95%) is having its moment today. Revenue is accelerating, profitability has turned positive — a rarity for software stocks — and the artificial intelligence revolution appears to be reviving demand for its platforms.

Founded in 2003, Palantir began by helping U.S. military and intelligence agencies in the war on terror. But the company appears to be transforming to become more commercially oriented. That’s good news for shareholders, because the commercial market is much larger.

Commercial operations commenced

Palantir showed a clear acceleration in its commercial business in the latest quarter. Commercial revenue grew 33% to $307 million, or 45.3% of revenue. That’s quickly gaining on the traditional government segment, which held up well with growth of 23% to $371 million. Both segments accelerated year-on-year, allowing the company to more than double its growth rate from the year-ago quarter, from 13% growth in Q2 2023 to 27% total growth in Q2 2024.

That’s a pretty staggering increase in growth rates, and it tends to get harder, not easier, as a company gets bigger. But under the hood, things look even rosier for the future commercial revenue outlook, especially in the dynamic U.S. market.

In the second quarter, U.S. commercial revenue was up 55%, but would have been up 70% if not for lower prices on initial low-revenue deployments with “strategic” customers. Total U.S. commercial customers grew 83% to 295 commercial customers, and total customers grew 41% year over year. Finally, U.S. remaining commercial contract value (RDV), which sums up all remaining value of unfulfilled contracts, grew a whopping 103% year over year.

It is worth noting that the United States currently accounts for just over 50% of total commercial revenues.

The acceleration coincided with the unveiling of Palantir’s AI Platform (AIP)

In his letter to shareholders, CEO Alex Karp included the following graphic on customer adoption:

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 AI software that helps companies harness the power of large language models (LLMs) and apply them to real-world contexts so companies can drive tangible results. CEO Alex Karp has said that AIP is disrupting or “devaluing” enterprise backend application development processes, much like cloud computing disrupted traditional enterprise technology infrastructure.

From the above chart, it’s clear that Karp and Palantir are right about AIP. In his letter to shareholders, Karp emphasized AIP’s ability to leverage the power of large language models to drive real business outcomes, saying that using LLM without the full context of the business and AIP won’t work:

Models with trillions of parameters may be able to mimic Goethe flawlessly, but without more parameters, they add little value to the enterprise. They were born into this world without any sense of its contours or logic, or any notion of truth or basic facts, let alone the collective knowledge and insight into the operations of an organization employing half a million people… They are wild animals whose power and capabilities must be tamed and harnessed. And now we see what is possible when that happens.

AIP also leads to the creation of new vertical products

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 designed specifically for modern industrial manufacturing companies. “The American Manufacturing Operating System,” Karp called it, built on Palantir’s previous experience in the military and heavy industry.

From conversations with analysts, it appears that Warp Speed ​​will connect all elements of manufacturing, from the enterprise resource planning (ERP) system to the manufacturing execution system (MES) to the manufacturing lifecycle management (PLM) system to the PLCs for factory automation and even workers on the shop floor.

With Warp Speed, Palantir is tailoring AI to specific industries in a way that has the potential to revolutionize the traditional enterprise software market, and those markets are pretty big.

Looking to the coming decade

The defense segment is still important to Palantir and to some extent defines its corporate brand. However, it is highly likely that the commercial segment will soon become its largest. In ten years, it could eclipse the defense business, which is somewhat limited in terms of potential size.

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

However, given the much larger private sector compared to the U.S. and allied defense industry, Palantir’s accelerated commercial traction seems to brighten its long-term growth prospects. If the commercial segment continues to grow at the pace it is currently experiencing, Palantir could significantly impact several segments of enterprise software. For example, in the context of Warp Speed, the ERP software market alone was $71 billion in 2023, but is projected to grow 14.4% by 2032, reaching $238 billion by then, according to Fortune Business Insights.

So if Palantir can maintain its leadership position in AI-powered enterprise software with AIP, Warp Speed, and other potential future offerings, it has a ton of opportunities ahead of it that could potentially justify its current valuation.