CEO of Palantir Technologies (NYSE:PLTR) Alex Karp recently spoke at the World Economic Forum where he spoke on a wide range of topics and issues related to his company's business and broader mission. In this article we will look at two implications from his comments on the PLTR investment thesis to explain why we remain bullish on shares here.
Today, the United States remains the number one global military power according to general consensus and its military might is even more dominant when combined with its lengthy list of military allies in Europe and East Asia, including the likes of major powers such as Great Britain, France, South Korea, and Japan.
However, this favorable balance of power relative to near peer potential adversaries such as Communist China may not last forever. First and foremost, its military spending is being spread thin due to its enormous military obligations across the globe. Despite recently closing hundreds of military bases in Iraq and Afghanistan, the U.S. military still maintains ~800 bases in over 70 countries and territories external to the homeland. In contrast, China currently only has one foreign military base, as it is focusing the vast majority of its military resources on its domestic sphere, particularly the Taiwan straits.
On top of that, the United States is pouring tens of billions of dollars into military aid to countries such as Ukraine, Israel, Egypt, and others while also continuing to devote substantial resources towards fighting insurgencies and countering terrorist threats around the world. Meanwhile, China is focusing nearly all of its military spending on preparing to fight and win a war against the United States and its allies in the South China sea as well as investing aggressively in advanced military-related technologies such as artificial intelligence, hypersonic missiles, space, and nuclear weaponry.
As a result, U.S. defense spending is far less efficient than China's in terms of maintaining a competitive edge against its greatest potential foreign adversary. This means that the United States' military superiority over China is largely dependent on the fact that it spends more than twice annually on so-called defense than China and Russia combined. Unfortunately for the United States, this budget gap is very unlikely to be sustainable given that China's economy has been significantly outgrowing the United States' for some time now and is expected to pass the United States' in total GDP by 2030 according to some estimates, though the exact timing of this is uncertain due to potential economic downturns in both countries in the near future.
With China's GDP rapidly closing the gap with the United States' and its spending being much more efficiently targeted at waging war against the U.S. in its most strategic geographies, the U.S. will have to figure out how to become much more efficient with its defense dollars or it will fall hopelessly behind China in its preparedness for a potential conflict scenario. This is where PLTR comes into play. CEO Alex Karp at the World Economic Forum recently discussed this issue and stated:
People look at the U.S. spend and wonder if they could do the same thing for much less money.
With software like PLTR's Gotham, the U.S. military will be able to operate much more efficiently. Not only will PLTR's A.I. systems enable commanders and even senior officials to make better fact-based decisions and devise fact-based strategies more quickly, but it will also enable limited military resources to be allocated more efficiently in a manner that will optimize their effectiveness and get taxpayers greater bang for their buck. Ideally, this will translate to the U.S. needing fewer pieces of military hardware and even fewer overseas military bases in order to have the same effect. It should also enable military units to be more efficient with fewer Soldiers, providing further cost savings to the Pentagon.
With China pouring resources into A.I. powered military applications, the U.S. will be forced to increasingly do the same. As the leading player in the military applications A.I. field in the U.S. if not the Western world, PLTR stands to benefit. This is largely why PLTR management said on their recent earnings call:
Our ambition is to be the sixth prime contractor for the U.S. Federal Government, a trusted partner to deliver complex end-to-end integrated hardware and software solutions, building on the legacy of programs that we prime today. But we seek to be the first company to do this as a software prime, using software innovation and our unmatched expertise to deliver new integrated hardware software capabilities faster than the pace of conflict.
Alex Karp also made an interesting comment at Davos when he stated:
All I care about is where is my company going to be in a few years.
While many CEOs claim something similar, this is acutely true with PLTR because its model has always been focused on building the best software products that it can for large enterprises. In the past, it was focused almost exclusively on government enterprises and today it is focused on both government agencies and private sector corporations. Given the required scale, scope, and strength of enterprise software products, PLTR typically takes up to 5 years to fully build them. As a result, the true value of PLTR at any point in time is often never fully appreciated until ~5 years down the road. The bright side of this, however, is that due to the length of time required for fully building and implementing a new enterprise software product, they often have even longer durations in the marketplace.
Another thing that Mr. Karp brought up at Davos was that the current downturn in the tech sector has opened up opportunities for PLTR to attract and retain more of the best employees in its industry and not have to compete with startups for top talent. When we look at PLTR's recent hiring activity according to LinkedIn, we see that regardless of all of the recent reports of an impending recession and job cuts at innovative businesses like Tesla (TSLA) and Coinbase (COIN), PLTR continues to hire aggressively, particularly in its Business Development and Sales departments while also maintaining a healthy double-digit growth rate in engineering hiring.
|Program & Project Management||5%||+14%||+31%|
Arts and Design
In April and May, PLTR added ~100 employees each month, which is pretty significant when considering that their entire employee count is ~3,350. The company has over 500 job openings currently, with massive growth in job openings for sales and business development positions.
This reflects that PLTR is continuing to invest aggressively in R&D and building new products at an accelerated pace, but is even more focused on scaling the business with new clients as rapidly as possible by investing aggressively in its sales team. This bodes very well for revenue growth in the coming quarters.
PLTR is more essential than ever as a potential difference-maker in the blooming geopolitical competition between the United States and China. This will likely not only be as a source of technological excellence, but as a data analytics resource for improving the efficiencies of the U.S. Department of Defense, thereby enabling it to maintain a favorable power balance with potential adversaries like China.
On top of that, PLTR is investing aggressively today in building new products and innovation alongside an extremely aggressive expansion of its sales team. While these two major focuses are not noticeable in the short term and if anything provide a significant drag on quarterly reports in the near term, over the next 3-5 years they should - if successful - provide outsized positive impact to the value of the company.
Given the massive macro tailwinds for PLTR's industry and its competitive positioning to capitalize on those tailwinds as well as its prudent commitment to long-term thinking in how it invests its capital, we remain bullish on the stock. To see our updated valuation model on PLTR stock, read our recent Q1 earnings analysis here.
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This article was written by
Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Marketplace Service.
Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.