Is Palantir's Deal With Databricks a Game Changer?

In April 2023, data analytics company Palantir Technologies (NASDAQ: PLTR) commercially released its fourth major software suite, called the Artificial Intelligence Platform (AIP). Since its release roughly two years ago, Palantir has experienced something of a renaissance -- transitioning from primarily a government contractor specializing in work with the U.S. military to a full-blown enterprise software platform deployed across many of the world's leading businesses.

For the most part, AIP's impact on Palantir's business has been seen through rising customer acquisition, accelerating revenue growth, and widening profit margins over the last couple of years.

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However, Palantir has also demonstrated a high level of transparency with investors beyond traditional financial reporting. Specifically, a couple of times per year Palantir hosts AIPCon -- a live conference during which customers showcase how AIP is deployed across their respective businesses and talk in detail about how the software is driving operational efficiencies and spurring new growth opportunities.

Earlier this month, Palantir hosted the sixth installment of AIPCon. And there was an announcement that I did not see coming.

Below, I'm going to detail Palantir's new partnership with Databricks, one of the most valuable private start-ups in the world. I'll make the case for why I think this alliance could be incredibly lucrative for Palantir in the long run and assess if now is a good time for investors to get in on the action.

How are Palantir and Databricks working together?

Palantir specializes in building data ontologies, which is fancy term technologists use to describe how large corporations can visualize complex datasets. You can think of an ontology as a giant workflow or mapping system. Through these visualizations, businesses can better trace data workloads and make more informed, efficient decisions.

On the other hand, Databricks specializes in building data warehouses and data lakes. In simple terms, Databricks allows businesses to store and process large datasets across various cloud architectures such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP).

The subtle nuance between these two analytics providers is that Palantir AIP is optimized for running contextual simulations to see how a business could be impacted based on a set of parameters, whereas the Databricks Intelligence Platform is primarily leveraged for computational tasks such as machine learning, given its ability to store and process multiple data silos across different platforms.

Palantir's real-time analytics and Databricks' storage and compute prowess complement each other greatly. By combining both software suites, corporations can scale their generative AI protocols more efficiently.

Image source: Getty Images.

Why is this deal important?

As I alluded to, Palantir has long been considered as a consulting operation for the government given the company's close alliance with the Department of Defense.

However, as the last two years have shown, the introduction of AIP has fueled a new wave of private sector growth for Palantir -- which now derives almost half of its revenue from commercial customers.

Image source: Palantir Investor Relations.

With that said, Palantir only has 571 commercial sector customers at the moment. I say "only" because this figure pales in comparison to the 10,000 businesses deploying Databricks. Per the company's website, Databricks has penetrated more than 60% of the Fortune 500.

While the trends above indicate that AIP has helped Palantir make a splash in the private sector, I see a strategic benefit to partnering with Databricks -- namely, Palantir now has a lucrative opportunity to cross-sell its products within the Databricks ecosystem, further diversifying its customer roster outside of government agencies.

Is Palantir stock a buy right now?

One of the hardest aspects of assessing an investment in Palantir revolves around its valuation. By just about every traditional metric, Palantir's valuation is overstretched.

For example, unlike many software-as-a-service (SaaS) growth stocks, Palantir is actually generating positive net income and free cash flow. With that said, the company is trading for a price-to-earnings (P/E) multiple of 442 and a price to free cash flow ratio (P/FCF) of 180. The figures above make clear that while Palantir is a profitable business, its profitability profile is still quite small -- hence, using earnings-based valuation multiples for Palantir isn't entirely helpful.

PLTR PS Ratio data by YCharts

Instead, I'll use the price-to-sales (P/S) ratio to benchmark Palantir against a set of high-growth SaaS peers (as seen in the chart above). Even with a considerable sell-off in Palantir stock over the last several weeks, shares remain pricier compared to other leading software peers on a P/S basis.

Although the trends above show some clear signs of valuation expansion in Palantir over the last year, I see compelling growth opportunities ahead -- thanks in large part to the company's various strategic alliances. In my eyes, the deal with Databricks is a game-changing complement to Palantir's existing private sector partnerships with Meta Platforms, Amazon, Oracle, and Microsoft -- many of which are recent and have yet to fully bear fruit.

Despite the pricey nature of the stock, now may be a good opportunity to take advantage of some fleeting depressed price action. In the long run, I think Palantir's sales and profit growth will continue accelerating -- especially as the company forges more alliances with the software industry's biggest and most influential players.

Should you invest $1,000 in Palantir Technologies right now?

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Meta Platforms and Palantir Technologies. The Motley Fool has positions in and recommends CrowdStrike, Datadog, Meta Platforms, MongoDB, Oracle, Palantir Technologies, ServiceNow, and Snowflake. The Motley Fool has a disclosure policy.