Palantir: Redefining Enterprise Software for the AI Era

Company Overview

Founded in 2003 by Peter Thiel (co-founder of PayPal, early Facebook investor, and prominent venture capitalist), Alex Karp (a former academic with a doctorate in social theory), Stephen Cohen, Joe Lonsdale, and Nathan Gettings, Palantir Technologies draws its name from the "Palantír", the seeing-stones in J.R.R. Tolkien's The Lord of the Rings. In the story, the Palantír were mystical stones used for seeing across vast distances, a fitting metaphor for Palantir’s mission to bring clarity to complex data.

Backed by the CIA’s venture arm, In-Q-Tel, Palantir became a key partner for intelligence agencies, providing tools to analyse and derive insights from vast amounts of data. Although many details remain classified, the company has been involved in high-profile operations, including the capture of Osama bin Laden and more recently, assisting Ukraine’s defense forces with AI-powered tools in the conflict with Russia.

The combination of Karp’s outspoken leadership, his pro-West rhetoric, and Thiel’s innovation-driven vision has fostered a cult following around the company. Retail investors and fans alike view Palantir not just as a transformative force in AI and data analytics, but also as a company with a clear mission. This fervor is amplified by the mystique surrounding Palantir’s operations, Karp’s charismatic persona, and the company’s strong ideological stance, making it a unique entity in the technology and investment landscapes (Forbes).

Palantir’s platforms—Gotham, Foundry, and Apollo—are at the core of the company’s offering. These platforms were initially developed for government use but have since expanded into industries like healthcare, finance, and manufacturing, showcasing Palantir’s versatility and growth potential.

Foundry, in particular, has gained significant attention for its ability to accelerate business value. Businesses using Foundry can extract value in weeks or months rather than years, thanks to its integrated data and application stack, which includes solutions for MLOps and AI/ML workloads. This performance-driven technology enables businesses to operationalize data quickly and efficiently, fostering the company’s reputation as a leader in AI-driven solutions.

As Karp has stated, “Once companies try Palantir, their competitors are forced to adopt it just to keep pace,” highlighting the competitive edge Palantir’s technology offers. This sentiment is reflected in Palantir’s performance.

For years, Palantir was often dismissed by skeptics and even labeled as a company with overly ambitious marketing or questionable ties to government surveillance. Critics have called it overhyped or overly secretive, and rumors have swirled about its dependence on government contracts and limited scalability in the private sector. However, the company’s recent financial performance and growing traction in commercial markets have gone a long way toward disproving these narratives, forcing even the harshest bears to reconsider Palantir’s potential as a leader in AI-driven transformation.

Financials

• Palantir’s financial performance underscores its impressive growth trajectory and operational efficiency. Over the past year, earnings surged by 223%, with a compound annual growth rate (CAGR) of 52.4% over the last five years, highlighting the company’s ability to scale rapidly and capitalize on increasing market demand.
• Revenues also reflect this strong momentum, growing 22.5% annually over the past five years, demonstrating a sustained acceleration in both the commercial and government sectors.

• Palantir has also made significant strides in improving profitability, with margins rising from 6.9% to 18% in the last 12 months. This improvement points to the company’s ability to leverage its technology more effectively, driving higher returns as operations scale. As Palantir continues to capture increasing commercial market share and optimize its processes, these margins are poised to expand further, solidifying its position as a highly profitable leader in the tech industry.

• The company closed 104 deals over $1 million and expanded its customer base by 39% YoY to 629 clients, with U.S. commercial customers growing 124.5% YoY.
• Palantir’s free cash flow margin stood at an impressive 60%, with $1 billion in adjusted free cash flow on a trailing twelve-month basis.

These results underscore Palantir’s ability to scale profitably, demonstrating robust unit economics with 80%+ gross margins and a 160% increase in net profit margins over the last 12 months. If this growth continues, Palantir has the potential to evolve into a high-margin business with a cash flow profile that could rival some of the top players in the industry.

Growth Catalysts

1. Exponential Growth in AI Adoption Palantir’s AIP is driving unparalleled success across industries, enabling businesses to integrate AI seamlessly into their operations. Notable use cases include:
   • A manufacturing company achieving $10 million in savings through AI-powered disruption management.
   • NHS hospitals reducing care backlogs by 28%, showcasing AIP’s transformative impact in healthcare.
   AIP’s ability to integrate disparate data sources and deliver actionable insights positions it as a must-have tool for organizations embracing AI-driven transformation. With over 500 bootcamps conducted in 2024, Palantir is scaling AIP distribution efficiently, moving closer to frictionless deployment.The internet is filled with videos and testimonials from Palantir’s clients, all praising the software for its ability to optimize processes, reduce costs, and enhance overall efficiency.
2. Commercial and Government Synergy Palantir is platformizing its government offerings—Gotham, Gaia, and MetaConstellation—to allow defense contractors to build on its infrastructure. This shift smooths revenue cycles and opens new licensing opportunities. Combined with the explosive growth in commercial clients, Palantir is expanding its addressable market across both sectors.
3. Financial Leverage Through Margins Palantir’s incremental operating margins of ~70% signal the potential for a 60-70% margin business as it scales. The Rule of 40 score of 68% underscores its strong balance of growth and profitability, setting the stage for long-term financial outperformance.
4. Palantir also made the strategic move from the New York Stock Exchange to Nasdaq on November 26, 2024, with the aim of gaining inclusion in the Nasdaq-100 Index. The stock was also included in the S&P500 in late September 2023. This shift could potentially attract significant capital from index funds and ETFs, further boosting the company’s investor base.

Risks

1. Valuation Concerns Trading at over 56 times sales, Palantir’s valuation demands flawless execution. Any misstep in revenue growth or margin expansion could lead to significant market corrections.

1. Reliance on Government Contracts While Palantir’s commercial revenue is growing rapidly, its dependency on government contracts remains a vulnerability, especially in uncertain geopolitical environments.

1. Execution and Competition Scaling AIP and maintaining its competitive edge requires continuous innovation. Competitors in AI and data analytics could pressure Palantir’s growth trajectory.
2. Market Expectations High expectations for 30-35% revenue growth into 2025 create a risk of underperformance if growth slows or if incremental margins compress.

Valuation

Palantir’s valuation reflects its potential as a dominant force in AI and enterprise data analytics. With 80%+ gross margins and expanding operating leverage, the company is well-positioned to evolve into a high-margin cash-generating machine. If the company sustains 35%+ revenue growth and maintains its incremental margins, it could achieve $12-15 billion in revenue by 2030.

However, at its current price of $66, Palantir appears significantly overvalued. While the recent price surge has generated substantial returns for early investors, it is challenging to foresee much more upside at these levels. The market’s optimism hinges on Palantir’s ability to continuously outperform expectations and maintain its growth trajectory, but the downside risk is now considerable.

As an investor, I chose to take profits at $60+, recognising the potential for near-term overvaluation. Nevertheless, I am holding a portion of my position for the long term, given Palantir’s robust prospects. If the stock experiences a substantial drop below $48, I may consider adding more.

Looking ahead, my five-year projections suggest:

• Revenue growth of approximately 35% per annum, driven by the company’s expanding footprint in commercial and government sectors.
• Net profit margins increasing further to 30%, reflecting sustained operational efficiency balanced with growth investments.
• A future P/E ratio of 45x, assuming Palantir continues to command a premium valuation as a leader in the AI and data analytics space.

If these assumptions hold, Palantir has the potential to deliver significant shareholder value over the long term, with a trajectory toward becoming a cornerstone of enterprise software in the AI-driven economy. These estimates depend on Palantir’s ability to execute on its growth catalysts and navigate the inherent risks of its high valuation and competitive landscape.