While most software companies, from the small ones (C3.ai, MongoDB…) to the large ones (Adobe, ServiceNow, Salesforce…), are now wannabe AI companies, Palantir is the real deal in our view. The company, known for its software products used by governments/military around the world, has developed over the years an AI platform (AIP) that is quickly gaining traction with both government and business customers.
That was perfectly illustrated by Palantir’s latest quarterly report, in which revenue growth accelerated for the fifth quarter in a row to 30% (+33% government, +27% business), comfortably ahead of expectations, leading the company to raise its FY24 revenue growth guidance to 26% from 23-24% previously. The strong top line performance sparked another significant margin leverage, with the Q3 operating margin reaching 38% vs. 34% expected.
This performance, achieved despite increasing competition for AI software market share, suggests that Palantir is emerging as a leading AI platform offering supply chain management, operational and maintenance planning, production optimization, and contract/invoice management to a wide range of industries.
It also confirms that AI monetization and adoption by businesses are accelerating, in line with last week’s comments by the Tech giants (Microsoft’s 365 Copilot revenue taking off, Meta’s products usage getting a boost from AI…). In all, after recent concerns, AI ROI is finally coming, giving more leeway in our view to hyperscalers to keep investing massively in their AI infrastructure and to enterprises to roll out more ambitious AI initiatives.
On the customer side, AI productivity gains should flow through the entire economy over the years and provide industrial and services businesses with major profitability improvements. But in the most immediate term, we believe that software-intensive businesses (video gaming, cybersecurity…) should be the big winners as AI coding assistants become the norm (e.g. Microsoft’s GitHub) and as some of the efficiency gains already reported are impressive (e.g. 25% of new code at Google being written by AI).
Longer term, we stick to our view that AI challenges are emerging and posing fundamental risks to entire segments of the software industry, as some of the most powerful AI models are going to compete head-to-head with traditional software solutions and as coding assistants are going to lower the barriers to entry and fuel a new generation of software start-ups. This is true for both vendors of customer applications and vendors of AI tools.
In conclusion, one will need to be very careful and picky when investing in the software sector as the wide performance discrepancies we have seen this year (Palantir +143%, Adobe -19%, Snowflake -43%…) are likely to repeat over the years depending on the evolution of the competitive environment in each software segment.
