2023-11-21 16:00:41 ET
Summary
- Palantir Technologies Inc. AIP Boot Camps are driving revenue growth and may be the solution to efficiently selling its complex product.
- The company's ability to deliver high-security, AI-driven solutions to slow-moving sectors is increasing its value.
- Palantir's valuation is high, but its unique business model and customer retention contribute to its growth potential.
There are basically three reasons why I fundamentally like Palantir Technologies Inc. ( PLTR ) even though it appears to trade rich at first glance. On top of that, Palantir appears to have found a solution to its scaling problem (Boot camps). I think that's resulting in the re-rate in the markets that's ongoing. If the Boot camp growth stalls out or that thesis is wrong, I'd expect the stock to fall back again.
The basic fundamental reasons I like Palantir are that it has: 1) very sticky business model with a lot of pricing power down the line 2) strong culture that's differentiated and likely inspiring to insiders, 3) leadership is unconventional but thoughtful. It's not that CEO Alex Karp won't make mistakes (fewer than I, would I'm sure), but I think he'll learn from them. I initially bought some around the IPO and wrote it up , as an interesting but speculative long below its IPO price in the fall of 2022.
I also buy into the idea that the company isn't generating the margins it can ultimately get because it is in the early stages of pushing out a complex product into very traditional and slow-moving sectors (like governments and big business). The way I see it, the value of its product is also magnified by the sudden availability of AI models that you and I can talk to, and that can understand your intentions well enough to make products like that of Palantir suddenly vastly more valuable.
It is quickly becoming very interesting to unlock enterprise proprietary or confidential data available throughout your enterprise. It is no longer the playground of data specialists and is unusable by anyone else unless it was structured. Every time I listen to someone working in a large enterprise, one of the first things that has them worried about using (or having their colleagues/employees use) LLMs like ChatGPT, etc., is all sorts of data compliance. Another widely heard concern is of data breaches, cybersecurity, etc. Palantir was originally conceived to serve the U.S. government, and cybersecurity is key. It is very hard to reach the highest levels of security and compliance when these have to be layered on top of a data or AI product but weren't an integral part of the design from the outset.
What's been somewhat worrisome is that Palantir's year-over-year growth kept falling. In part, it is understandable because the company was coming off very high growth rates, and companies tend to IPO when things are going very well. But it was getting to a disappointing growth rate, and that's with the backdrop of the war in Ukraine.
Recently, revenue growth has accelerated back up again. This could be a blip in the data, but the reason I believe there is grounds for optimism is that Palantir started with its AIP Boot Camps around ~5 months ago. They were very enthusiastic about these on the recent earnings call, and they may be the solution the company has been looking for to efficiently "sell" its complex product.
This could also explain the uptick in gross margins:
Here's what the company said about that on its earnings call :
Maybe to start with the second one here with AIP. I think you should really think that the boot camp is more than just what's happening in the boot camp. Because you're exiting the boot camp with a series of use cases that are production ready or near production ready that you can go forward with. You're exiting the boot camp with as the customer and usually IT with enough hands-on experience with the product that you can actually keep going and compounding it going forward.
So there is this exit velocity that's fundamental to it, where it's not just the go-to-market motion, it actually now becomes the implementation motion. It becomes the way in which you engage with partners because now partners can run their boot camps. Partners can drive use case growth for themselves around what came out of the boot camp and the exit velocity around that. So I think it's quite profound and why you're seeing both our emphasis of it and the impact that it's having on both the financials and the operating reality of the business.
Palantir is now on track to conduct boot camps for more than 140 potential customers, and about half of these are scheduled for November. They are doing more of these boot camps than they've done U.S. commercial pilots in the previous year. The share price has recently rallied. That's probably in part because speculative tech as a group has rallied recently. These were often considered to be rate sensitive and indeed, the long bond has rallied as well in the past month. However, I also think the market is sniffing out margin and revenue acceleration, which is of course, a powerful cocktail.
That's especially true for Software as a Service ("SaaS") businesses. Often employed methods to value these companies are EV/revenue comparisons or the rule of 40 methods. The graph below shows Palantir as a black cross within a universe of U.S. tech companies scored on these metrics:
Currently, Palantir has respectable growth rates, but even within this aggressively valued cohort, it is clearly at the higher end of the range in terms of valuation. That means, the market is at least partly pricing in accelerating growth. On the other hand, it is likely also a function of Palantir's business model and mission-critical product line. Its products aren't easy to sell, but after that, they're very hard to cut.
Conclusion
Palantir's newly developed innovative sales methods through AIP Boot Camps are a potential reignition of the company's growth trajectory. Palantir's ability to deliver high-security, AI-driven solutions to traditionally slow-moving sectors is clearly more valuable than ever. There are conflicts all around to remind all kinds of institutions (state-owned or not) that they need to step up their game.
Its valuation remains on the higher end even within a group that traditionally gets awarded rich multiples. The company's unique business model which I expect to be characterized by super-high customer retention drives some of that. Otherwise, a lot depends on the continued success of the new sales method. If this effort falters I think the stock will retrace some. Finally, Karp has mentioned that Palantir is now eligible for S&P 500 (SP500) inclusion. That may already be contributing to gains as well. I do believe it is a helpful tailwind and plan to explore it in a future article.
For further details see:
Palantir Found The Scaling Solution: Boot Camps Are Reigniting Growth Trajectory