The year 2024 was a breakout for enterprise software company Palantir Technologies (PLTR -1.85%). Some of the more notable highlights include gaining inclusion into the S&P 500 and Nasdaq-100 indicies. Moreover, Palantir stock gained over 357% in 2024 -- making it the top-performing stock in the S&P 500 by a mile.
The biggest tailwind fueling Palantir's growth is, by far, artificial intelligence (AI). Over the last two years, a combination of retail investors, equity research analysts, and large institutional funds helped shape the bull narrative surrounding Palantir -- underscored by the company's Artificial Intelligence Platform (AIP) software suite.
With that said, most use cases showcasing AIP highlight how large corporations are using Palantir to enhance their data analytics capabilities in areas such as fraud detection, logistics, healthcare, and more. By contrast, one area that's often overlooked is how Palantir is assisting the U.S. military in its AI roadmap.
Let's explore a new partnership Palantir formed with drone specialist Red Cat Holdings (RCAT -5.99%), and delve into what makes it unique and why it could be a game-changer for Palantir in the long run.
Why is Red Cat's partnership with Palantir important?
In the age of AI, one of the emerging themes in the defense space is unmanned, autonomous systems. These can include products such as boats, submarines, or aircraft are controlled entirely by AI.
Red Cat is a drone company that specializes in robotics and software development for the U.S. military. The company develops a "Family of Systems" approach to its products and services -- offering an ecosystem of drones, sensors, and cost-efficient services to assist with mission-critical operations, particularly in reconnaissance environments.
Palantir is primarily known for its data analytics chops but also has some more niche products that fly under the radar. One such service includes Palantir's Visual Navigation (VNav). The simplest explanation of VNav is that it's an alternative navigation platform for drones when traditional methods, such as GPS, are unreliable.
As per the partnership with Palantir, Red Cat will be integrating VNav and Palantir's operating system (dubbed Warp Speed) into its Black Widow drones.
The deal with Red Cat likely isn't a coincidence. Just days before the partnership was announced, Palantir also shared that it's partnering with another military-focused autonomous systems developer, Anduril.
Image source: Getty Images
How does the partnership change the game?
Over the summer, Wedbush Securities equity research analyst Dan Ives posited an interesting idea when it comes to Palantir's valuation. He suggested that investors should look at Palantir through the lens of a sum-of-the-parts (SOTP) model. In an SOTP analysis, investors should look at each segment of the business individually and apply a separate valuation to each one.
As it relates to Palantir, it can be daunting trying to assess an appropriate value for its public-sector operation. Working with the federal government tends to be lumpy and can be non-recurring in nature, so these types of businesses generally don't fetch valuation premiums as high as a high-growth software company, for example.
Nevertheless, throughout the latter half of 2024, Palantir identified new ways to parlay the type of growth it's experiencing on the commercial side of the business to its public-sector operation. Namely, the company partnered with hyperscalers, including Microsoft and Amazon, which are both deploying their cloud infrastructures on AIP.
Furthermore, Palantir is also strengthening its ties with defense contractors, such as L3Harris Technologies, and government consulting behemoth Booz Allen Hamilton. These strategic partnerships will likely translate into reaccelerating growth across Palantir's public-sector business. More importantly, not only will this lead to higher revenue streams, but it also should help Palantir expand its gross margin and profitability profile.
All told, I see the deal with Red Cat as a game-changer. Palantir is laying the groundwork as the leader in AI-driven protocols for the U.S. military for years to come.
