Nvidia (NASDAQ:NVDA) is a great artificial intelligence (AI) company, and its stock is worth buying for many reasons. These include the company’s dominance of the rapidly growing AI chip market and CEO Jensen Huang’s impressive track record of staying ahead of competitors.
That said, Nvidia’s massive size will make it increasingly difficult to achieve high growth rates in key metrics such as revenue, profit, and cash flow over time. All else being equal, it is easier for small businesses to grow on a percentage basis.
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Palantir Technologies (NYSE:PLTR) is a much smaller but rapidly growing AI company than Nvidia. If management continues to perform well, the company’s stock, like NVIDIA stock, could be a big long-term winner. One of the main reasons for this potential is the company’s impressive business model.
Palantir is a Software-as-a-Service (SaaS) company that provides AI-powered software in the cloud through subscriptions. Its customers include agencies within the U.S. government and allied nations, as well as commercial customers in a wide range of industries. The company’s platform helps customers use data to increase efficiency and effectiveness.
Palantir initially focused on U.S. government agencies involved in intelligence and defense. The heavy reliance on government spending, which can be very expensive, made some investors hesitant to buy the stock early on. However, the company has made great strides in building its commercial business. In the just-reported third quarter, Palantir’s government operations accounted for 56% of total revenue, with commercial operations contributing the remaining 44%.
Metrics/Features
Palantir
Founding year
2003
How long has it been since it was listed?
4 years or more (after September 2020)
Founder-led?
yes
Market capitalization
$137 billion
Was your company profitable on a GAAP* basis in the most recent quarter?
yes
Will it be profitable over the next 12 months on a GAAP* basis?
yes
Wall Street’s annual profit growth forecast for the next five years
59%
Data source: Yahoo Finance. Data as of November 11, 2024. GAAP = Generally Accepted Accounting Principles.
Palantir hasn’t been publicly traded for very long, but it’s well established. Plus, unlike many relatively new publicly traded technology companies, it’s profitable.
For reference, NVIDIA’s market capitalization is approximately $3.6 trillion as of November 11th. This makes the company’s market capitalization approximately 26 times that of Palantir.
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Palantir has a business model that generates recurring revenue. Companies with this type of business model tend to be attractive for the following reasons:
It can generate very high operating margins and profit margins.
These can generate strong operating cash flow margins (operating cash flow/revenue) and free cash flow margins (free cash flow/revenue).
Their source of income tends to be more stable.
Capital expenditures tend to be relatively low. SaaS companies don’t sell physical products, so they don’t need to invest in a manufacturing plant.
As long as Palantir continues to satisfy its existing customers, you should expect most customers to renew their subscriptions and some to increase their subscription spending. This is a big advantage since acquiring new customers is often time-consuming and expensive for businesses.
In fact, Palantir is delighting its existing customers. Net dollar retention in the third quarter was 118%, Chief Financial Officer Dave Glaser said on the company’s third-quarter earnings call. This means that existing customers spent an average of 18% more on the company’s products compared to last year. Of course, Palantir is growing by adding new customers.
company
Adjusted operating profit margin (MRQ)
Adjusted profit margin (MRQ)
Operating cash flow margin (MRQ)
Free cash flow margin (MRQ)
Palantir
38%
33%
58%
57%*
microsoft (NASDAQ: MSFT)
47%
38%
52%
29%
Data source: Company earnings report. MRQ = most recent quarter. Operating profit margin = operating profit/sales. Profit Margin = Net Profit/Revenue. Cash flow margin was previously defined.
I chose Microsoft as a comparison company because it focuses on software and is known for its high profit margins and strong cash flow. In other words, this is a tough comparison. Look how good Palantir is.
There may be one number that stands out to you. That’s Microsoft’s free cash flow margin. The reason this is much lower than the company’s operating cash flow margin is because Microsoft is making significant capital expenditures. This means you need to invest in data centers to keep your cloud computing services business competitive.
If you’re a long-term investor, the first thing you should do when considering buying a stock is take a closer look at a company’s business model. You can learn a lot about a business model just by looking at how they make money. Of course, there are other factors to consider, such as what advantages you have over potential competitors. Who is your target market? How large is your target market likely to be?
Companies with substandard or so-so business models may do well in the short term, and their stock prices may even skyrocket in the short term. But the stocks of these companies aren’t big winners over the long term.
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We currently have “double down” alerts on three great companies, and we may not see an opportunity like this again anytime soon.
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*Stock Advisor returns as of November 11, 2024
Beth McKenna holds a position at Nvidia. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
One Key Reason Palantir Stock Could Be the ‘Next Nvidia Stock’ Original article published by The Motley Fool
