The first time I ever heard about Palantir (Nasdaq: PLTR), several years ago, it was pitched to me as an “equity crowdfunding opportunity” to make a private investment, and a rare chance to buy into one of the hottest defense IT stocks on the planet before its IPO. There was just one problem:

Did I mention this was the first time I had ever heard of Palantir? That means I had never heard of it before, and had no idea how big of a deal (other) investors thought Palantir was going to be. And so I politely declined the chance to invest in Palantir pre-IPO.

Palantir stock is up seven-fold from its $10 IPO price, by the way.

Sour grapes

“And so what?” thought I to myself. So what if a lot of (obviously uninformed) investors think Palantir is a super-hot defense stock, and the best thing since sliced MREs? I still had only the vaguest understanding of what the company even did. Clearly, it couldn’t be that important.

Obviously, everyone else was overpaying for Palantir. Obviously, it was just another meme stock. After all, how else do you explain the fact that Palantir shares cost a crazy 330 times earnings? Lockheed Martin and General Dynamics are defense stocks too, and they cost only 20 times earnings or less.

And yet, the more I look into Palantir today, the more I think I might have been wrong about it.

Palantir is growing like wildfire — and profitable

What was my first clue? Well, let’s start with the fact that over the last 5-6 years, Palantir’s revenues have more than quadrupled, from $595 million in 2018, to $2.65 billion over the last 12 months.

Or the fact that Palantir has flipped from losing money five years ago, to making gobs of greenbacks today. In 2018, Palantir racked up $580 million in net losses on its $595 million in revenue, meaning for every $1 the company collected, suffered almost $1 in losses. That was then, though, and this is now, and now, Palantir is raking in a healthy $477 million annually.

Admittedly, on a $157.7 billion market capitalization, that still leaves us with a stock costing 330 times earnings. But it’s a whole lot better than a stock with no earnings at all, and nothing but losses to show for its work.

One could also argue that Palantir is even cheaper than its P/E makes it look. Over the past year, Palantir has generated $980 million in positive free cash flow. That’s more than twice its reported profit. Put another way, for every $1 Palantir reports as net profit, it deposits $2.05 in its bank account in cold, hard cash.

A defense play on the AI revolution

What is making Palantir such a success? The artificial intelligence revolution is a large part of this story.

As an AI stock, Palantir’s business is divides roughly 55-45 between military and security work for government customers, and AI-driven data analytics for major private-sector businesses. Now, businesses’ interest in AI is widely known. What many people may not appreciate, though, is how big a role AI is starting to play in the military, where its software is used for everything from improving overall situational awareness for the warfighter, to optimizing sensor data for improved targeting, to predicting upcoming maintenance requirements for military hardware.  

There’s hardly an aspect of the military machine that Palantir isn’t working hard to improve with AI. And with the money the government spends to kickstart Palantir’s capabilities in these realms, the company can tailor them to commercial uses as well, helping to grow both halves of the business simultaneously.

Make no mistake, at 330 times earnings and even at a price-to-free cash flow ratio half of that, I still think Palantir’s stock is overpriced based on the 27.5% long-term annual growth rate analysts have it pegged for. I have no intention of buying into the stock at this valuation. That said, there’s more to Palantir stock than just meme-stock momentum.

There’s a real business behind the PLTR stock symbol, and it’s growing rapidly and profitably. At the right price, I’d be happy to buy it.

$10 a share, anyone?

 

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