Transcription
Just a few weeks ago, legendary tech stock analyst Dan Ives said that Palantir was the Messi of AI, and he put a $25 price target on the stock. But just a few days ago, Morgan Stanley downgraded Palantir's stock to an underweight rating with a $9 price target, citing trouble monetizing their artificial intelligence platform, AIP. So which one is it? Will Palantir's stock rocket to $25 per share, or will it come crashing down by 40% or more?
Your time is valuable, so let's get right into it. Let me start off by saying that this isn't a video about Palantir somehow being bad, and I'm not rooting for them to fail. I've made video after video talking about their incredible software engineering and all the ways that they can transform big enterprises with mountains of data. But there are a lot of misconceptions about what Palantir's platforms actually do, how they do it, and which markets Palantir could capture as a result. That's why Dan Ives can call them the Messi of AI one week, and Morgan Stanley can give them an underweight rating the next.
Let's start with Dan Ives. Here's a recent clip from CNBC's The Exchange where he explains his bull thesis on Palantir:
"Dan, the Messi of AI, I mean that’s a tall order right there. I think that's really what Carp's built, and in my opinion, it's still undiscovered as just a broader AI play, which is why I believe they're the Messi of AI. I think there's a golden path right now for them to monetize what we view as potentially a trillion-dollar market opportunity, and I think investors still have not recognized what this Golden Goose could be.
Case in point: Ukraine. Palantir is a key example of that. Do you think this is a situation where investors don’t fully understand what this company does, because so much of it is defense tech? Yes, I realize it's expanding out to the commercial side too, but there's a lot that they can't talk about. For example, I think that’s the biggest misperception. I can tell you, the reputation of Palantir speaks for itself in terms of, you know, any sort of operations with three-letter agencies.
Now, if you’re an enterprise CIO—and this is the conversation I’ve had—you’re looking toward an AI platform approach. Palantir is potentially the first call. And that’s why I think in this AI gold rush, where I view it as the fourth industrial revolution—of course it’s Nvidia and Microsoft at the top of the mountain with the Dela—you look at second, third, and fourth derivatives right now: Palantir front and center. You look at our bull case model. I think this is ultimately $25, and I think as they execute more, investors start to look at it. But also I think this is one where maybe retail has been ahead of institutional in terms of understanding the actual potential AI story here.
I can tell you in my conversations today, it’s really institutional investors being like, ‘Okay, what am I missing in this story? Where is the actual total addressable market opportunity, and can they go from government to commercial?’ Because I think when you start to look at that, for them, is really the opportunity."
I’m just curious, what does that look like on the commercial side? What are you seeing there?
"I see from a platform approach in terms of scale, and in terms of use cases, they’re probably the first call. I think they're probably in this market the purest AI play out there now. They built it; others are coming, but it just speaks to our view in this fourth industrial revolution. Palantir is going to be a big player. The first time I ever heard a major company say machine learning came from Palantir."
Yeah, and of course, there are applications that, you know, supply chains, which is a big area now for many companies—manufacturing applications. There’s something to be said about, okay, you work with the government in a classified capacity. You have these high-level clearances for things like cloud applications, as well, which only a couple handful of companies do. Palantir is one of them. You’re going to keep my data safe—I’m sure there’s probably that in and of itself has a certain cache with commercial clients, I would imagine.
But how does it happen alongside an uncertain macro environment where people are tightening belts? I mean, for big tech, we’re seeing an uptick ultimately when it comes to AI. That’s potentially 8 to 10% of budgets next year, and they’re the only ones out there. They’ve proven it now; they’re proven in the enterprise. That becomes a bigger piece. That’s why, then, the stock gets rated, which is why we're bullish on it."
Alright, I actually agree with a lot of what was said here. Foundry has a ton of AI capabilities for a wide variety of verticals, including ones with lots of physical assets like defense, space, supply chains, and logistics. And I can tell you from my time working with the Department of Defense and from my personal experience with Foundry that Palantir is doing everything right when it comes to connecting, organizing, enhancing, and reporting sensitive data to get actionable insights to decision-makers very quickly.
I wish I had something like Foundry when I worked at MIT. And just like Dan Ives said, there’s no doubt that retail investors have been way ahead of institutions when it comes to Palantir stock. But if you watch this clip again, his thesis is not as strong as it sounds. Dan Ives thinks that Palantir has a golden path to monetizing AI. Palantir is potentially probably the first call that enterprises make when they want to adopt an AI platform. Palantir is going to be a big player in the AI revolution—all of these are in future tense, not present tense.
The problem here is that the AI revolution is already here, and it's not the kind of AI that Palantir has been working on. We are in a generative AI revolution right now, which focuses on things like transformer-based large language models, diffusion-based image generators, and generating 3D structures from 2D images using NERFs. And we can already see who the current big players are simply by looking at the numbers: ChatGPT’s record-breaking user numbers, Nvidia’s guidance-shattering data center numbers, and product after product being launched by Google and Microsoft, both of which already have massive distribution channels in the commercial sector and in government.
Make no mistake, these products all compete with Palantir’s offerings—not because they’re better, but because they’re chipping away at different capabilities that Palantir's platforms provide, which lowers the overall value that comes from switching to Foundry. For example, OpenAI recently announced ChatGPT Enterprise. Is this going to be anywhere near as good as Palantir’s AIP? Probably not. But will it be good enough to make some companies think twice before going all in on Palantir platforms? Absolutely.
That’s why this is such a big deal. Also, Dan Ives is focused on three-letter government agencies being reference customers that will make commercial companies want to switch to Foundry, but these same agencies are probably among the smallest beneficiaries of generative AI right now, thus making them some of the least valuable reference customers in this area. Commercial executives are not stupid; if they think that generative AI can increase their productivity and profit margins, they’re going to look at how other commercial companies are using it.
That’s why Dan Ives said that it's Nvidia and Microsoft at the top of the mountain, and it's only when you look at second, third, and fourth derivative companies that Palantir is front and center. And that's why I think in this AI gold rush, I view it as the fourth industrial revolution—of course, it’s Nvidia and Microsoft at the top of the mountain. You look at second, third, and fourth derivatives right now: Palantir front and center.
Don’t get me wrong here; it’s totally possible that Palantir will blow the generative AI doors open for governments. After all, Palantir is one of only three companies with impact level six clearance, which is the highest level security clearance given to information systems by DAA. But the other two companies on that list are Amazon Web Services and Microsoft, both of which have deep relationships with government agencies and are leaps and bounds ahead of Palantir in terms of generative AI. That’s why I cover them so much on this channel.
Now, I know what you’re probably thinking: isn’t Palantir’s artificial intelligence platform generative AI? Well, not really. AIP is actually a wrapper for third-party large language models; it lets enterprises deploy commercial or open-source LLMs, and then AIP sets rules and guardrails on what data that LLM can access, which models it can use to calculate its answers, control the kinds of actions it can take, and keep a full audit log of everything the model does, what resources and references it used to do it, and everyone who prompted it in the first place.
Don't get me wrong; that's a ton of value that AIP is adding on top of LLMs, but there are two big problems that Dan Ives isn't talking about. First, almost all of AIP's features will eventually be built into the large language models themselves. Remember, Microsoft owns 49% of OpenAI. Things like user guardrails, data permissions for approved actions, audit logs, no-code functions, and code co-pilots are all things that companies like Microsoft, Google, and Meta Platforms are working on today because they want to see wide adoption for their models.
And second, Palantir doesn’t know how they’re going to monetize AIP yet. On their most recent earnings call, Alex Carp said that Palantir will figure out how to monetize it in the future. As a shareholder, I’m really excited for that, but that means that AIP clearly won’t be a major part of Palantir revenues anytime soon. Check out this quick clip from CNBC's Earnings Central where RBC Capital Markets analyst Rishi Galura explains Palantir’s position when it comes to generative AI:
"Based on all my conversations with industry people, with heads of IT, CIOs, with even Palantir employees and former Palantir employees, this is not truly a generative AI company. I think generative AI is phenomenal technology. I do think it is a seismic shift in the technological landscape, but we really have to scrutinize what are the technological offerings on display. What is differentiated here? And when we look at Palantir, and based on all our conversations, this does not appear to be anything truly differentiated when it comes to generative AI. This really feels like the same Palantir services and technology that they’ve been selling, which has its value. I’m not saying there’s no value in the technology and using it alongside LLMs that others have on the market—be them from OpenAI, Anthropic, or Meta—but they’re not actually adding a tremendous amount of value to be a leader in generative AI, even though they are positioning themselves as such in front of the investment community and even in front of CIOs and CEOs."
So let's cut to the chase. I mean, is it creating enough value to justify Palantir being an $18 to $34 stock? I don't think so, right? I think, look, this is the most expensive stock in all of software—at least up there, right? And I think that’s on the backs of retail investment interest. I think that's on the back of AI hype, and I just don’t think that sort of premium multiple is warranted, especially for a business that we believe is 30% professional services rather than being 100% recurring subscription software.
And so for that reason, we don’t think it’s worth the price that the stock is trading at today. We think it’s worth substantially lower.
So, no one is saying that Palantir is a bad AI company, but I do think Palantir’s position in the whole generative AI revolution is questionable at best—at least for the short term—which means so is their valuation. Palantir had their Quarter Two earnings call a little over a month ago, and that's actually when I realized just how little they're benefiting from generative AI. Palantir's government revenue grew by 15% year-over-year, and their commercial revenue grew by just 10%. Compare that to the second quarter of last year where their government revenue might have grown by 133%, but their commercial revenue by a whopping 46% year-over-year.
That's why everyone was talking about Palantir's big pivot from government to commercial industries last year, but their commercial revenue growth has slowed down significantly almost every single quarter since then.
Okay, what about their net dollar retention rate, which is a measure of how sticky a company is with their existing clients? A year ago, Palantir ended Quarter Two with a net dollar retention rate of 119%. That means Palantir's existing clients increased their spending by an average of 19 cents on the dollar. This year, that number was so low that it didn't even get its own half-slide; it was a footnote on their revenue growth chart. By the way, this isn’t the first time that the layout of Palantir's investor presentations has changed to deemphasize certain numbers, but that's a complaint for another time.
What investors should be complaining about this time is their total revenue growth, which only increased by 13% year-over-year. Last year, Palantir's revenue was growing by 26% year-over-year, which means their revenue growth literally got cut in half. And with growth this slow, stock-based compensation becomes a big issue again.
Palantir’s shares outstanding increased from roughly 2.05 billion shares in 2022 to 2.28 billion in 2023. That means us shareholders got diluted by 11% last year. This is one of those points that investors might be willing to overlook when growth is good and the path to capturing market share is crystal clear, but considering revenue growth was just 13% this past year, this 11% shareholder dilution is a bitter pill to swallow.
So where does that leave us, Palantir investors? In my opinion, the biggest near-term catalyst is their potential inclusion in the S&P 500. If that happens, a lot more investors will hold the stock, which could make it much less volatile. Institutions might give it a higher multiple since it'll be a much less risky stock to put into things like retirement accounts and pension funds.
I'm also looking forward to seeing Palantir buy back shares at what I hope will be a reasonable price. And of course, I’m also hoping that Palantir's revenue growth picks back up, especially in the commercial sector. Based on my experience with Foundry, I think that Palantir has something truly special. They have a best-in-class AI platform; I just don’t think much of that value has been coming from generative AI.
So for now, I actually think they’re fairly priced at around $13 to $15 per share. That means I plan on holding on to my current Palantir stock, but I won’t be buying anymore until they fix their revenue growth, their shareholder dilution, or both.
Make sure to let me know how wrong I am in the comments. I’m excited to hear your thoughts. And if you want more updates on artificial intelligence stocks, including which ones I’m investing in now, consider signing up for my upcoming newsletter. Just head to TickerSymbolU.com/AI if you're interested, and don't worry; I’ll never spam you. I’m way too lazy for that.
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