For much of the last two years, big tech has dominated the storyline revolving around artificial intelligence (AI). "Magnificent Seven" members Microsoft, Amazon, and Alphabet have invested billions into the likes of ChatGPT creator OpenAI and perhaps its biggest rival, Anthropic.
Meanwhile there is Tesla, Elon Musk's brainchild that's looking to bring self-driving cars and humanoid robots to the masses. And of course, virtually none of the generative AI applications being developed by these megacap tech enterprises would even be possible without the help of Nvidia's graphics processing units (GPUs) and proprietary software.
If you've read any of my prior pieces, you'll know that I tend to use Nov. 30, 2022 as my starting point for the AI revolution. To add some context, that is the day ChatGPT was released to the public. Since then, Nvidia has outperformed each of its Magnificent Seven peers by a long shot -- gaining over 700% as of market close on Dec. 12, 2024.
To put it bluntly, this is Nvidia's world and everyone else is just living in it. Smart investors realize, however, that the performances of even the greatest behemoths can be matched. Outside of big tech, one company that has maintained star status in the AI realm is Palantir Technologies (PLTR -0.42%).
Palantir has proven that it's capable of competing with larger incumbents in the world of enterprise software, and some investors such as billionaire entrepreneur Chamath Palihapitiya argue that the company hasn't even begun to scale yet.
With so much potential on the horizon, is it possible that Palantir is the next Nvidia hiding in plain sight? Let's dig in and find out.
During Palantir's third-quarter earnings call, CEO Alex Karp made an interesting statement regarding how data integration is the most important variable when developing AI-powered services.
Karp proclaimed, "the experts that write about these things seem to believe the commodity, i.e., the LLM, is the valuable aspect of this and that the actual asset, meaning how you manage the commodity, is the actual value."
What Karp is trying to say here is that large language models (LLMs) are more of a commodity than a proprietary technology. While Alphabet's Gemini, Amazon's Claude, Meta's Llama, and ChatGPT all offer unique features, the average user can't really tell the difference between these platforms. From Karp's purview, the real value proposition is how data is fed into LLMs through supporting software integrations. And that's where he believes Palantir has an edge.
In April 2023, Palantir released its fourth major product called the Artificial Intelligence Platform (AIP). In the table below, I've included a number of key performance indicators that illustrate the impact that AIP is having on Palantir.
Data source: Palantir investor relations.
The advent of AIP has been transformative for Palantir. Growth in the company's customer roster is leading to accelerated revenue every quarter while profit margins have maintained a healthy level. The combination of revenue growth and strong margins provides Palantir with robust financial flexibility in the form of consistent free cash flow.
By all accounts, Palantir looks unstoppable. Yet despite this impressive performance, there is further analysis to discuss before labeling the company as one with Nvidia-esque potential.
When comparing a company to Nvidia, there's more to the equation than just valuation and share price.
Nvidia's emergence as the biggest player in AI is not just due to its GPUs and compute networking business. It's actually how that business really works. Nvidia's hardware (i.e., GPUs) is tightly integrated with its Compute Unified Device Architecture (CUDA) software platform.
The combination of Nvidia's GPUs layering on top of CUDA has basically created a "lock-in" effect with its customers -- essentially owning the AI stack within its customers' ecosystems. It's this dynamic that has helped Nvidia acquire an estimated 90% market share -- absolutely owning AI inferencing and training protocols.
Furthermore, with more than $1 trillion of AI infrastructure spend projected over the next three years, Nvidia's tight grasp on the market puts it in position to continue acquiring incremental market share, making its upside even more lucrative.
When it comes to enterprise software, I just can't say that Palantir has commensurate potential to that of Nvidia. In my eyes, GPUs and data centers are "must-have" items for generative AI development. By contrast, software and data analytics are more in the "nice-to-have" bucket.
Despite its importance in data processing and making LLMs more useful, I question whether enterprise software is truly indispensable. Moreover, with intense competition from the likes of Snowflake, Databricks, and many more, I think Palantir may struggle to create a similar "lock-in" dynamic like Nvidia has managed to do.
As much as I admire Palantir's management and am proud to hold the stock myself, I cannot say that the company will become the next Nvidia.