Palantir (PLTR) is a leading data analytics and artificial intelligence software company with a mission of ensuring that the West achieves dominance in the exploding world of data and machine learning.

The company's primary customer for its first two decades of operation has been the United States Government, through its Gotham platform. Now the company is investing heavily in growing its Foundry platform, which services medium and large sized companies. It is also growing its Gotham platform to include a greater piece of the United States Government’s spending as well as defense contractors and allied governments. (See Palantir stock analysis on TipRanks)

Growing Rapidly

The main value for PLTR currently comes from its world-class data analytics and artificial intelligence platforms. These enable government agencies and corporations to manage, extract significant value from, and optimize large troves of data. They also provide a very rapid and user-friendly data integration and set-up experience.

As a result of the value they add to an organization as well as the mission critical nature of their industry, Palantir is able to command significant switching costs, and therefore enjoys pricing power and sticky customer relationships that often see contracts expand over time.

The company is experiencing rapid growth across its businesses, particularly in the United States, and management is investing aggressively to recruit and retain the best engineers and sales personnel. It is striving to deliver the highest quality product possible while also scaling the business as rapidly as they can.

They company seeks to gain a larger portion of the pie of its ~$120 billion total addressable market. Currently, it has only ~1% of that total market, so the company enjoys a massive growth runway. Management projects that the company will grow by at least 30% per year for the foreseeable future, which should enable it to become the major – if not dominant – data analytics players in its target markets by the end of this decade.

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Facing Headwinds

That said, the company does face a few potential headwinds – one external and one internal. While its Gotham platform enjoys a wide moat thanks to its increasingly mission critical role in the United States’ defense technology infrastructure, its Foundry platform has a tougher hill to climb. Foundry is quite expensive, and is therefore unaffordable for many companies who might be better served by a cheaper alternative from one of many capable competitors.

Furthermore, the company is currently issuing large amounts of stock-based compensation to employees, which destroys profitability and dilutes existing shareholders considerably.

Valuation Metrics

Despite these headwinds, PLTR is nonetheless a high-quality company and is an odds-on favorite to be a major player in its field for years – if not decades – to come. Additionally, the valuation is not as far-fetched as it may seem, as the company is well on pace to achieve 40% adjusted operating margins.

The company continues to scale at 25%-35% revenue growth per year. That would generate sufficient profitability (even when accounting for the hefty stock-based compensation) to drive double-digit annualized total returns for the stock over the next decade.

Wall Street’s Take

From Wall Street analysts, PLTR earns a Hold analyst consensus based on 2 Buy ratings, 3 Hold ratings, and 4 Sell ratings in the past 3 months. Additionally, the average analyst price target of $21.75 puts the downside potential at 5.23%.

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Summary and Conclusions

PLTR has tremendous upside potential and is well-positioned to emerge a winner in the data analytics and machine learning space. It stands to shine particularly in assisting Western government agencies with high-priority missions and in helping large corporations with unlocking and optimizing their use of large swathes of data.

The business is likely to experience rapid growth over the next decade and beyond, which could deliver strong returns for shareholders. That being said, investors should remain cautious, given the challenges the company faces. Commercial competition, stock-based compensation, and Wall Street’s neutral stance on the current valuation are all valid reasons for hesitation.

Disclosure: On the date of publication, Samuel Smith had a long position in PLTR.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.