Is the Partnership Between Palantir and Red Cat Potentially Revolutionary?
Is the Partnership Between Palantir and Red Cat Potentially Revolutionary?
In 2024, enterprise software company Palantir Technologies (PLTR dropping 2.40%) experienced significant growth, making its way into both the S&P 500 and Nasdaq-100 indexes. The company's stock skyrocketed over 357%, making it the standout performer in the S&P 500.
The primary driving force behind Palantir's success is artificial intelligence (AI). Over the past couple of years, retail investors, equity analysts, and institutional funds have contributed to a bullish sentiment toward Palantir, which is underscored by its Artificial Intelligence Platform (AIP) software suite.
While many uses of AIP showcase how large corporations use Palantir to enhance their data analytics capabilities in sectors like fraud detection, logistics, healthcare, and more, a less-discussed area is Palantir's aid to the U.S. military's AI strategy.
Let's delve into a new collaboration between Palantir and drone specialist Red Cat Holdings (RCAT up 14.93%), and understand why it could be a pivotal move for Palantir.
Why is Red Cat's partnership with Palantir significant?
In the era of AI, the defense sector is witnessing an increase in unmanned, autonomous systems. These can range from boats, submarines, and aircraft controlled solely by AI.
Red Cat is a drone company that specializes in robotics and software development for the U.S. military. Leveraging a "Family of Systems" approach, Red Cat offers an ecosystem of drones, sensors, and cost-efficient services to support mission-critical operations, particularly in reconnaissance environments.
Palantir, renowned for its data analytics capabilities, also offers niche products on a lower profile. One such service is Palantir's Visual Navigation (VNav). Essentially, VNav serves as an alternative navigation platform for drones when traditional methods, such as GPS, fail to be reliable.
Under the partnership with Palantir, Red Cat will integrate VNav and Palantir's Warp Speed operating system into its Black Widow drones.
This partnership may not be a mere coincidence. Just days prior to its announcement, Palantir also revealed it was collaborating with another military-focused autonomous systems developer, Anduril.
How does the partnership shift the landscape?
Equity research analyst Dan Ives of Wedbush Securities proposed an intriguing idea with regards to Palantir's valuation. He suggested that investors should perceive Palantir through a sum-of-the-parts (SOTP) model. An SOTP analysis demands investors to evaluate each segment of the business independently and assign a separate valuation to each part.
Valuing Palantir's public-sector operation is challenging given the unpredictable nature of working with the federal government. As a result, such businesses typically don't command valuation premiums as high as high-growth software companies.
Nevertheless, throughout the latter half of 2024, Palantir discovered new methods to apply the growth it has achieved on the commercial side to its public-sector operation. Specifically, the company partnered with hyperscalers, such as Microsoft and Amazon, which were implementing their cloud infrastructure on AIP.
In addition, Palantir strengthened ties with defense contractors, like L3Harris Technologies, and government consulting giants, like Booz Allen Hamilton. These strategic partnerships are expected to re-accelerate growth in Palantir's public-sector business. Furthermore, they should also help Palantir expand its gross margin and profitability profile.
All in all, I see the Red Cat deal as a transformative move. Palantir is positioning itself as a leader in AI-driven protocols for the U.S. military for years to come.
Investors looking to capitalize on Palantir's growth in the defense sector might consider diversifying their portfolios to include Red Cat Holdings, given its partnership with Palantir. With this collaboration, Palantir is investing money into enhancing its Visual Navigation (VNav) technology, which could significantly impact its future finance prospects.
The integration of Palantir's VNav and Warp Speed operating system into Red Cat's Black Widow drones could potentially open new revenue streams for Palantir in the defense sector, further bolstering its financial position.