We're Adding This Polarizing AI Name to the Bullpen
We like the expanding customer dynamics, but we’re waiting for this before taking the plunge.
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Over the last several weeks, we’ve shared numerous data points and signals pointing to the ongoing and likely accelerating adoption of AI in companies and other entities.
Those data points keep us bullish on the Portfolio’s position in ServiceNow NOW, Elastic NV ESTC and others in the Portfolio as we move out of the initial AI innings, a shift that should favor software companies. It’s also not lost on us that software and cloud-based services are generally not impacted by tariffs.
Last week, we mentioned that we would be looking at some government contractors that have been beaten up so far this year, and the market’s move lower this week has only added to that. Yet, we are seeing signs of greater pushback on freewheeling cost-cutting efforts by the Department of Government Efficiency (DOGE), with U.S. Senate Republicans pushing for Congress to codify spending cuts. The recent Supreme Court ruling of 5-4 that declined to let President Trump withhold certain payments to foreign aid organizations also doesn’t bode well for White House hopes of cutting spending allocated by Congress.
We still agree there is waste to cut and inefficiencies to be rooted out, but Congressional approval over proposed DOGE cuts means public voting records, and that increases the odds of smaller DOGE cuts than previously stated. While tariff uncertainty remains in the air, this more measured approach to cost cuts lifts an overhang that has been companies that benefit from government spending, including our own Lockheed Martin LMT.
Palantir to the Bullpen
That removal, combined with the pronounced pullback in its shares and prospects for EPS growth of more than 36% this year (vastly faster than the market), have us adding shares of Palantir PLTR to the Bullpen.
While much has been made about the company’s exposure to the federal government, its software is used across 90 industries and the larger global government sector accounted for 55% of revenue last year. The balance was from the commercial sector. While those percentages matched the ones for 2023, Palantir’s customer count jumped to 711 exiting 2024 from 497 at the end of 2023, nearly double compared to the end of 2023.
When we look at Elastic, one of the metrics we closely track is subscription revenue per customer. The slope of that line has been very positive and backlog and deferred revenue metrics suggest that should continue. With Palantir, deferred revenue also continued to climb, while its average revenue per user continued to increase as well. For 2024, the average revenue across its top 20 customers was $64.6 million, up from $54.6 million in 2023 and $49.4 million in 2022. Commercial remaining deal value (RDV) stood at $1.79 billion exiting 2024, up 49% sequentially and 99% on a year-over-year basis. That equates to about 47% of expected 2025 revenue.
Sizing up these figures, we find more customers using more of Palantir’s offerings across its four principal software platforms: Gotham, Foundry, Apollo and the Palantir Artificial Intelligence Platform (AIP). The combined mission of those platforms is to allow institutions to harness vast quantities at their disposal to make smarter decisions. We see that making Palantir not only an AI play but a productivity one as well. Similar to other companies, the shifting mix toward AI solutions should drive better pricing and margins inside Palantir.
As we add PLTR shares to the Bullpen, we will note two things:
One contributor to the recent pressure in the shares that we have to discuss is insider selling and its optics. In 2024, CEO Alex Karp sold $2 billion in stock and more recently sold another $45 million as well as established a 10b5-1 plan to sell up to 9.975 million shares by September 12, 2025. In recent weeks, other executives, including CTO Shyam Sankar, ex-CAO Heather Planishek and President Stephen Cohen sold large amounts of shares between $90.27 and $108.28. Earlier this week, board member David Moore unloaded 20,000 shares between $83 and $91 but retained more than 1.39 million shares after those trades.
On the one hand, given the rocket ship ride PLTR shares have been on, it’s hard to blame them, but we would rather see insiders buying the shares than selling.
Second, the beta, which measures a stock’s volatility relative to the overall market, clocks in around 2.8, which tells us it is far more volatile than the market. That could be a gating factor in terms of position sizing when calling PLTR shares up to the Portfolio.
Given our earlier comments, at a minimum, we will want the market to digest upcoming comments from Fed Chair Powell before we make any moves with existing Portfolio positions or call PLTR shares up from the Bullpen. However, because we want to have the flexibility to do so when the time is right, we are making the move to put PLTR shares in the Bullpen. Should that come to pass, at that time we’ll lay out our price target thoughts and how that plays into our rating.
As we add PLTR shares to the Bullpen, we will also remove AMD AMD and TreeHouse Foods THS from it.
At the time of publication, TheStreet Pro Portfolio was long NOW and ESTC.
