Palantir Is A U.S. Defense Asset And A Long-Term Buy

Summary:

• Palantir Technologies Inc. combines long-term success potential with critical U.S. defense work, offering revenue stability but risks in global conflicts.
• With a strong moat in advanced data analysis, Palantir’s valuation reflects its quality, suggesting a better long-term than short-term Buy.
• Navigating geopolitical tensions, Palantir’s role may sway with global politics, impacting investors beyond conventional market risks.

Palantir Technologies Inc. (NYSE:PLTR) is positioned well for long-term success, and it is also vital for U.S. defense tasks, which both add security in the immediate future for recurring revenue stability but also lead to some potential vulnerabilities in the case of larger wars and defense demands. I consider the investment to be a strong allocation to niche, highly advanced data work, with a strong moat due to the difficulty of breaching its target markets. But the valuation prices its quality in, and so the shares are good over the long term, but cannot viably be considered for short-term price returns without taking on excessive risk.

Operations Analysis

I have not covered Palantir before, and for quite a while I have sat on the sidelines as I have watched many analysts tout the long-term prospects of the stock. To prepare for this article, I have researched deeply into Palantir’s offerings, and I have decided to present them here as a suitable analysis for investors who may also be new to the prospect of investing in Palantir. For those already knowledgeable on Palantir, I have added my unique commentary and insights into the firm’s major operational advantages, which have significantly informed my rating for the stock.

Palantir is primarily known for its two main software platforms, called Palantir Gotham and Palantir Foundry:

Palantir Gotham	Gotham is primarily used by U.S. government agencies, particularly by the intelligence community and the Department of Defense. It helps with pattern identification in highly complex datasets, and it also facilitates ease of collaboration between analysts and operators.
Palantir Foundry	Foundry is a central operating system for organizational data. Its main role is to aggregate siloed data sources into a common interface for accessibility, manageability, and advanced analysis. It is used in finance, healthcare, manufacturing, and more.

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From my research, I believe Palantir’s involvement with government operations provides it with a crucial sense of stability, as compared with its potentially more lucrative but less fixed commercial contracts. It is worth noting that both the government and commercial licensing contracts for Palantir software provide recurring revenue, which, I believe, is always a big plus for investors in forecasting future growth.

Palantir’s workforce consists mainly of data scientists and engineers, and so I think investors should be prepared that its operations are not going to provide an “Nvidia (NVDA) moment,” as some analysts have suggested. From my analysis, it seems much more reasonable to predict that Palantir will solidify its position in the market as a highly advanced but niche software provider for complex data tasks. This will not be the next Amazon (AMZN) stock by any means, and I think that is apparent and expected within Palantir’s management. Its target market is simply not mass-scale.

Now, that doesn’t mean that Palantir is not a worthwhile investment. Quite the contrary. I believe it is very well positioned for long-term success due to the fact I believe it will continue to develop a broad moat in complex, sophisticated and “best-in-class” military-grade data software. Just because that doesn’t have mass-market appeal, and the growth associated is likely to be lower as a result over the long term, it does not mean the company cannot have a very rich price return ahead of it, and what I predict could become a solid dividend-paying company once its markets are relatively fully saturated.

Peer Analysis

From my research, I believe these could be considered the most significant competitors to Palantir at the time of this writing:

Tableau, now a part of Salesforce (CRM)	Excels in data visualization, serving large companies, including Amazon.
Trifacta, now a part of Clearlake Capital Group	Known for data wrangling, aids organizations in data preparation, including Google (GOOG, GOOGL).
IBM (IBM) Watson Studio	Offers quick-response data preparation tools and accelerates AI adoption, serving Fortune 50 companies.

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Where Palantir seems to have some competitive advantage is in providing data services for higher-stakes, and higher-security fields, with a sophistication more ideal for intelligence and defense domains. This is something I believe cannot be said of the other three major competitors listed in the table above, and I think investors should consider just how strong and unique a moat Palantir is developing here. To my mind, I cannot think of a single other company with such a direct focus on high-profile security-driven domains for data work than Palantir. In my estimation, it is an excellent and highly inaccessible target market, so once it has been breached with trust and reputation, it will be difficult for rivals to compete effectively.

Now consider the following table of financial metrics for my four peers, minus Trifacta, as Clearlake Capital is a private firm:

	Palantir	Salesforce	IBM
Equity-to-Asset	0.77	0.6	0.17
5Y Avg. Revenue Growth Rate	30.42%	23.06%	3.09%
3Y Future Revenue CAGR Estimate	20.48%	10.41%	4.57%
Price / Sales (“FWD”)	18.96	7.7	2.72
IPO	2020	2004	1949
Market Cap	$50.8B	$292.85B	$173.39B
10Y Price Return	+149.57% (since 2020 IPO)	+471.26%	+1.67%

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It is apparent to me from the above table that Palantir offers very compelling growth prospects, much more so than IBM, and competitive alongside Salesforce. I believe Palantir is a very compelling long-term investment at this time, and I have reason to believe, based on analyst estimates, that the stock should provide reliable alpha over the coming decade.

Coupled with a balance sheet that is stronger than Salesforce, I can see no immediate detriments in the present financials. It seems to be simply a matter of time for the company to stabilize its profitability over the long term. By doing so, I think it will attract a whole new range of commercial and retail investors, and the stock may begin to rally above its IPO price. The only serious concern I have currently is that the company seems to be trading at a relatively unfavorable valuation, even by price/sales standards.

Valuation

Louis Naveller recently pointed to Brian White of Moness, Crespi, Hardt & Co., downgrading Palantir stock from neutral to hold as a result of its high price-to-sales ratio. Naveller quite astutely pointed out in his analysis that while Palantir is clearly “richly priced,” the firm’s growth could carry the price higher.

I agree with the general thesis that Palantir stock may be able to maintain its premium valuation over time, and I believe what will happen is that the multiples will incrementally contract as the firm’s top line continues to increase, and its bottom-line starts to see its first real exponential growth over the next 10 years.

At this time, a price-to-sales ratio of 19 on a forward basis, while undoubtedly signifying a premium, may be worth any short-to-medium term volatility that arises as a result of any momentary expectations missed during quarterly and full-year results.

My own perspective is that Palantir investors are in for somewhat of a turbulent ride, with potential price swings as a result of the present speculative valuation. But, nonetheless, the foundation for an enduring and successful company in advanced data software is here, and the company has proven its effectiveness in operations already. As a long-term investor, I cannot see a reason not to consider Palantir a Buy, even at the present uncomfortable valuation. Investors must simply be cautious that this cannot be a short-term play, in my opinion. The quality of the company and the price the market is commanding insist that it be held as an operational asset, not a price one.

Risks

Palantir operates at the intersection of government and commercial projects, so it has one foot in the military-industrial complex and another in the corporate-industrial complex. As such, there could be some conflict of interest here that disrupts one or more initiatives or deals, and I also see it likely that Palantir will fail to expand in some geographic regions, namely Russia and China, due to its heavy involvement in U.S. defense. This clearly links back to my previous point that the scalability of Palantir is not what some investors may think. This is a highly specialized and niche company in an advanced but highly valuable sector of data analysis for elite, high-profile clients.

Additionally, if tensions escalate between global powers, shareholders of Palantir may be negatively affected. I am monitoring this closely and I am personally hoping for a Trump election to help dissipate some of the heat between Russia, China and the U.S. at this time. Suppose Biden gets into office in 2024 for a second term. In that case, I believe there is some probability of a World War coming to fruition based on initiatives supported by his administration for Ukraine to join NATO. This would be terrible for wider U.S.-Russian cooperation, and China would likely side with Russia.

This is a terribly fragile time in global politics, and one must be aware that financial demands may be placed on Palantir in the service of the country that it otherwise would not consider taking on. In other words, national security interests could affect mere shareholder returns. I, for one, as a non-U.S. citizen, am praying for the return of Trump, and I urge others within the U.S. and outside of it to support his election.

Conclusion

I believe Palantir is an exceptional company with a very strong moat and niche in advanced data software that is suitable for elite corporate use and defense tasks. It has to navigate a very careful intersection between national interests and shareholder returns, so I believe investors should prepare for a stock that will perform well but not be the next Amazon or Meta Platforms (META) stock. However, for investors wanting a stake in high-quality and incredibly important data work, I can see Palantir being a very successful long-term investment.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN, GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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