Palantir: Potential 25%+ CAGR While Changing The Future

Jul. 16, 2022 9:30 AM ETPalantir Technologies Inc. (PLTR)128 Comments

Summary

  • Palantir has massive upside potential over the next decade.
  • PLTR also has the capacity to meaningfully change the course of history.
  • We discuss both in this article.
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For Palantir Technologies (NYSE:PLTR) the sky is the limit both in terms of its total return potential and capacity to shape the course of history. In this article we will discuss both to show why PLTR is not only a potentially enriching investment for your bank account, but also one which could help make the world a better place.

Why PLTR Stock Could Deliver A 25%+ CAGR Through 2030

The biggest reasons to be bullish on PLTR are:

  • It has a massive total addressable market that it has only just begun to scratch the surface of
  • It has a wide moat Gotham (government) business
  • It is growing rapidly with existing and new commercial customers via innovative products

Let's unpack each of these.

Massive Growth Potential

PLTR has an enormous total addressable market of over $120 billion and should see that number rocket higher in the coming years. This is because the global big data industry - in which PLTR is rapidly becoming a major player - is projected to experience a 20.4% CAGR through 2030. Assuming its total addressable market grows in-line with the broader industry, PLTR's total addressable market should be at least $600 billion by the end of 2030.

Analysts currently project PLTR will generate about $5 billion in 2025 and the company is expected to generate just shy of $2 billion in 2022. That means it currently commands less than 1.7% of its total addressable market, giving it massive growth potential. If the company can continue to innovate with useful new products - as it is investing aggressively in doing - and sustain its competitive advantage with its existing products - which its growth with existing customers implies it is successfully doing - PLTR should be able to enjoy revenue growth rates well in excess of 20% through the end of the decade, if not beyond.

Wide Gotham Moat

Another PLTR quality that makes us bullish on it is the strength of its Gotham business' competitive positioning in the Department of Defense. Between building relationships of trust over the past two decades by successfully producing products and features for various government agencies and ultimately satisfactorily execute missions that are critical to national security.

The reasons this is such a big deal in the government business are:

  1. Government is not profit-driven and often excessively wasteful, so relationships with key decision makers are often more important than the actual financial figures involved. This makes government contracts typically very lucrative for vendors.
  2. When it comes to these important missions with national security and/or lives on the line, trust and proven performance are far more important than scraping for every last dollar or even the latest technological innovations. As a result, PLTR has a huge leg up over competitors because U.S. government decision makers will almost always pick the vendor that their personnel are familiar with and trust over vendors that they do not know as well, even if their offer is more compelling from a value standpoint.

Clearly management is very bullish on their government business going forward, especially with rising A.I. competition with China and ongoing conflict and tensions between Russia and allies in Eastern Ukraine. As a result, they made the following bold statement 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.

Rapid Foundry Growth

Last, but not least, we are bullish on PLTR because it is growing its commercial (Foundry) business rapidly.

In its most recent quarterly report, PLTR generated 30.8% top line growth, which is obviously very strong. Even more encouraging was the fact that the growth was weighted heavily towards the commercial business, particularly in the U.S. (136% growth), though international commercial growth also accelerated by 200 basis points to 24%.

The reason this is such a big deal is because - as we have already discussed - PLTR's strength on the government side of the business is well established over nearly two decades of building trust and relationships and the company is widely expected to continue generating strong long-term growth.

This means that the true indicator of PLTR's growth momentum from a long-term perspective is how well its Foundry business is performing and how rapidly it is growing. Not only was the top line figure and accelerating growth rates in the U.S. and internationally reassuring, but the customer count was equally impressive. PLTR added 40 new customers during Q1 and saw 86% year-over-year growth in that category

The commercial customer count also saw continued strong growth, up 37 during the quarter and up 207% year-over-year overall. Given that over the past year its top 20 customers have increased their spending on PLTR products by an average of 24%, it appears that PLTR's products are delivering outstanding results for customers. This tells us that its existing revenue streams will likely prove to be quite sticky over time and that the company is building a powerful organic growth platform on which to sell new products as they come out.

Valuation Model

This all adds up to a view where we expect PLTR's revenue to grow at ~25% over the next eight years (assuming gradual addressable market share gain), leading to a revenue total of ~$11.9 billion in 2030 (~2% total addressable market share, up slightly from ~1.7% today). Its EBITDA margin was 31.7% last year, so if we assume only a slight improvement in economies of scale to a 33% EBITDA margin in 2030, we would see EBITDA come in at ~$4 billion. Assuming a reasonable EV/EBITDA multiple of 25x in 2030 (it currently stands at 26.57x), we would see a total enterprise value of $100 billion. Discounting that back to the present enterprise value we get a total return CAGR estimate of 25.7% between now and then.

Why PLTR Could Change The Course Of History

On top of its numerous strengths and mouthwatering total return potential, PLTR also is poised to make a meaningful dent in the course of history. While its Foundry platform and commercial products are certainly nice technologies that should help U.S. and U.S.-aligned businesses to be more efficient and competitive in the increasingly A.I.-powered and data-drive 21st century, its Gotham business is the one that could be truly history changing.

While the U.S. is currently the leading global military power, Communist China is investing aggressively to rapidly advance its own capabilities. In particular, it is intently focused on challenging the U.S.'s leadership in the Pacific region. This dynamic is so pronounced that it has driven leading hedge fund Bridgewater Associates founder Ray Dalio to predict that a new world order is coming in which there will be severe tensions, fierce competition, and potentially even open conflict between the United States and Communist China.

With the United States spread around the globe in roughly 800 military bases and over 70 countries, its military power and weapons development priorities are spread quite thin. In contrast, China has virtually its entire military and weapons development program laser-focused on defeating the United States in a conflict in the Pacific region, especially in the South China Sea.

Furthermore, even though the U.S. is still spending more on defense than China is, Chinese defense spending is much more focused and more efficient than U.S. defense spending and China's economy is set to pass the United States by 2030. Therefore, it is unlikely that the U.S. will be able to sustain any sort of competitive edge over the Chinese in the Pacific region in the not-too-distant future, even when partnering with allies in the region like Japan, South Korea, Taiwan, and Australia. This is where PLTR could potentially change the course of history. As CEO Alex Karp said recently at the World Economic Forum:

People look at the U.S. spend and wonder if they could do the same thing for much less money.

Essentially, the vision is for PLTR's technology to be useful for facilitating optimal resource allocation and troop movement. In that sense, it will be an ultimate "force multiplier" that can enable the U.S. to get much more bang for its buck relative to near-peer geopolitical foes like the Chinese. PLTR illustrates this capability in videos like the following:

Investor Takeaway

PLTR has numerous strengths, particularly a massive growth runway, a wide moat Gotham business, and accelerating growth in its Foundry business. On top of that, its discounted share price gives it mouthwatering total return potential, if it can continue to gradually grab market share.

On top of that, investors can also know that their investment is a part of a truly unique technology company that could alter the course of history by enabling the U.S. and its allies to successfully challenge the most pressing geopolitical conflicts of the 21st century, potentially even providing them a competitive edge in averting or winning a war with Communist China.

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This article was written by

Samuel Smith profile picture
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Become a “High Yield Investor” with our 8% Yielding Portfolio.

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.

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