Palantir Technologies (NASDAQ: PLTR) has emerged as one of the stock market's most extraordinary success stories over the past two years. The AI software company, renowned for its collaborations with defense and intelligence agencies, has witnessed its shares soar by 1,000% during this period, even reaching heights of nearly 1,500% prior to experiencing some pullback.
The company’s impressive favor among investors can largely be attributed to its Artificial Intelligence Platform (AIP), which has significantly enhanced the functionality and appeal of its technology, leading to accelerated revenue growth. Indeed, Palantir's revenue growth has been consistent, with figures increasing every quarter for the past year and a half. Its fourth quarter alone saw revenue jump 36% to approximately $828 million. Most of this remarkable growth originated within the U.S., where domestic revenue leapt by 52% to $558 million, buoyed by strong expansions across both commercial and government sectors.
Historically, Palantir secured its roots by assisting U.S. intelligence and defense agencies with counterterrorism efforts. Consequently, it’s no surprise to learn the U.S. government still constitutes roughly 40% of its total revenue stream. Yet, the company’s impressive performance stateside hasn’t translated to international markets, especially Europe, where growth appears to be stagnated.
Alex Karp, Palantir's CEO, expressed concern during the latest earnings call about the underwhelming European market, labeling its growth as "anemic." Karp pointed out Europe’s sluggish pace of adopting new technologies, noting, "It does look like the continent of Europe will look to the past as a way of getting to the future, struggles with the idea ..." This candid declaration highlights the difficulty Palantir faces; its European revenue, which accounts for around 13% of total earnings, only grew by 4% during the last quarter.
The slow uptake of technology may also reflect the reputational issues facing Palantir, known for its close ties to military operations. The company has been met with protests against its approximated $420 million contract with the U.K.'s National Health Service (NHS), and this year, France's national security agency ceased its collaboration with Palantir, opting instead to develop its own technological solutions. Incorporately, courts in Germany have blocked the utilization of technologies such as Palantir’s, raising privacy concerns about profiling individuals who haven't been accused of any crimes.
These issues bring to light significant hurdles for Palantir, wherein Karp’s critique of European markets could come off as finger-pointing rather than offering actionable solutions. Such tactics appear especially ill-timed, considering current international political relations have become rather tenuous. For example, the recent geopolitical climate has continued to strain U.S.-European ties, which only adds to the turbulent backdrop against which Palantir must operate.
Traditionally, large software enterprises have relied heavily on international markets to sustain their growth. For comparison, Salesforce, one of Palantir's peers, recorded 67% of its fiscal 2024 revenue from the Americas, with only 23% coming from Europe and 10% from the Asia-Pacific regions. Similarly, ServiceNow generates 63% of its revenue from North America, with European clientele contributing 26% alongside 11% from other regions. These market indicators suggest how imperative international growth is for technology companies, especially those with elevated market caps like Palantir, now exceeding $200 billion.
If Palantir can gain traction internationally, it stands to accrue significant additional revenue streams. These would not only become instrumental, particularly amid potential Pentagon budget cuts, but they would also help mitigate the risks brought on by the company's current overreliance on U.S. markets. Recent patterns show approximately 66% of Palantir's revenue stemmed from the U.S. alone, comparable to other leading companies like Salesforce and ServiceNow. Should these trends persist, Palantir may find itself disproportionately dependent on domestic markets for revenue, urging the need for enhanced performance domestically to offset international weaknesses.
Given these circumstances, investors should approach Palantir with caution. The company's stock is currently trading at a hefty price-to-sales ratio of 87, which leaves it vulnerable to significant declines should any unfavorable news arise. Market analysts from The Motley Fool have even indicated their preference for other stocks, excluding Palantir from their recommendations for solid investment opportunities at this time.
Understanding both the potential rewards and inherent risks involved with Palantir is key for investors as it navigates through these challenges. With its reputation intertwined with both government contracts and international relations, how it adapts to these dynamics will be pivotal moving forward.