Palantir (NYSE: PLTR) gained traction as one of the most popular AI stocks for investors looking for software companies. It has been in this industry for far longer than many of its competitors, which gives it an edge.
However, the stock's popularity and consistent buying caused its valuation to swell to a point where future returns are already accounted for in the stock price, which may cause anyone buying now to not see any return on their investment for some time (if ever).
Palantir's software can easily be described as data in, insights out. Now, there's a lot more to Palantir's software than just that, but that guiding principle is how Palantir's software is developed. Its AI software was originally intended for government use, but then expanded into the commercial segment.
Palantir's latest product has been a major growth catalyst, especially in the U.S. commercial market. Artificial Intelligence Platform (AIP) allows its customers to integrate large language models (LLMs) into a business to help guide decision-making and use internal data. This is critical, as many businesses don't want their internal data getting plugged into an LLM owned by another company, because they lose control over what happens to the data.
AIP can also integrate generative AI into workflows, which is a critical innovation. Most generative AI tools are used on the side to boost productivity, but when they are directly integrated into business systems, they unlock far more potential.
According to management, demand for AIP has been "unprecedented" compared to other products the company has launched.
This has shown up in its results, as revenue rose 27% year over year in Q2 to $678 million. U.S. commercial revenue increased 55% to $159 million. While this shows strength in this market, it also indicates that there is huge room for expansion as it only has 295 U.S. commercial customers.
However, the problem with the market's assessment of Palantir's stock is that the market opportunity isn't as large as some investors think.
If you annualize Palantir's U.S. commercial customer revenue (multiply its Q2 metrics by four) and divide that figure by the customer count, you get the average revenue per customer. That figure comes out to $2.15 million per customer, which shows this product's cost. This severely limits the potential client base Palantir can cater to, so the market opportunity is reduced to only the largest businesses in the country.