Palantir: Geopolitical Trade Of The Decade

For nearly 30 years, we’ve experienced the rise of living standards across the globe, as cross-border trade and trading agreements were shown to be more effective than war in achieving national interests at that time. However, that era is coming to an end.

The current relatively high prices for commodities along with the ongoing supply disruptions show the need for the development of more protectionist trade policies that encourage the shortening of supply chains in order to decrease the exposure to non-allied third parties, which don’t share the same values, view the world differently, and could pose a major threat in the foreseeable future. As we enter this new reality, which is in the midst of a bifurcation of the global system, we as investors should start preparing our portfolios to meet the new challenges that arise from the changing geopolitical landscape.

That’s where Palantir (NYSE:PLTR) comes into play. For nearly two decades, the company has been actively strengthening its ties with American federal agencies by providing its custom software solutions for various needs ranging from border protection to geospatial intelligence. At the same time, Palantir has been actively expanding to different markets such as the UK, France, and Germany, all of which are allies of the United States and are part of a single NATO military bloc. As the U.S. plans to mitigate the Chinese threats in the Indo-Pacific region, while Europe starts to decouple from Russia, Palantir has the opportunity to strengthen its ties with the western governments and military-industrial complexes, which would result in the creation of an additional shareholder value in years to come.

A Storm Is Brewing

Recently, I wrote an earnings previewarticleon Palantir, in which I outlined what investors should expect from the Q3 results that came out a week ago. What we saw from a report is that despite all the macroeconomic troubles, which forced companies to scale down their operations, Palantir nevertheless managed to aggressivelygrowits business, as its revenues of $477.88 million in Q3 were up 21.9% Y/Y. What’s also important to note is that the company’s governmental business also showed an outstanding performance in comparison to relatively weaker performances in Q1 and Q2, and was able togrowits revenues by 26% Y/Y in Q3 to $274 million, while also passing the $1 billion revenue threshold in the last twelve months.

Considering those numbers, it’s safe to say that the demand for Palantir’s governmental solutions is significant, and is more than likely to increase as we enter a new geopolitical reality. In my previous article on the company, I’ve already stated how the U.S. defense spending for 2023 is about to be the biggest in its history and is forecasted to increase even more in the years ahead. In the last couple of months alone, Palantir managed to receive record contract awards from various federal and defense agencies to help them enhance their software capabilities. Those contracts, such as the $95.9 millioncontractwith Homeland Security, the $229 million one-yearcontractextension with the U.S. Army Research Lab, the $59.1 million Armycontract, and the $85.1 millioncontractwith the U.S. Army Materiel Command, reveal the increased influence that Palantir has within the U.S. military-industrial complex. As such big contracts continue to be awarded, it’s more than likely that the company’s business would continue to generate aggressive returns and would also be able to increase the annual revenue per governmental customer, which stood at $9 million at the end of September.

On top of that, Palantir has also been actively increasing its presence in other allied markets such as the UK, France, and Germany. The United Kingdom in recent years has become its second-biggest market after the United States, and the company has all the chances to expand its presence there if it manages to secure a £360 millioncontractfrom the NHS in the following months. In addition, earlier this year the company managed to secure a $26.2 five-year contract with the German police, which marked one of its first major expansions in the country, while its cooperation with the French military-industrial complex in the last year hasaccountedfor 6% of its total revenues.

Palantir's Sales By Region(Palantir)

Considering all of this, it’s safe to say that Palantir is well-positioned to tackle all the challenges and seize all the opportunities that come with this changing geopolitical landscape, which should lead to the creation of shareholder value in years to come. That’s why I continue to believe that the company’s stock offers a decent upside for investors at the current levels, especially since it has no debt on its balance sheet, $2.4 billion in liquidity, and $4.1 billion in remaining deal value at the end of Q3. At the same time, the continued growth of its commercial offerings, which I plan to outline in my other article on the company, only strengthens the bullish thesis.

As for the value itself, Palantir’s management didn’t make any major changes to the top-line projections from the last quarter and it still expects to generate ~$1.9 billion in revenues in FY22. As such, my DCF models from the past don’t require any serious revisions for now, and in thebase caseand anoptimistic casecontinue to show Palantir’s fair value to be $10.03 per share and $12.08 per share, respectively, which implicates a decent upside in both scenarios.

The Bottom Line

As the world is changing, Palantir has a unique opportunity to help western governments and their defense industries to better prepare for the new reality. The latest earnings results proved that despite all the risks the company’s governmental business is still able to generate aggressive Y/Y returns and the latest contract awards along with the increase in defense spending make me believe that Palantir’s software would continue to be in high demand for years to come. This in the end could potentially lead to the creation of additional shareholder value and an appreciation of the company’s stock in years to come.