Palantir's high stock valuation may push some investors away, but there are cheaper ways to get in on the company's momentum, according to one analyst.
D.A. Davidson's Gil Luria said that Palantir (PLTR) "cherry-picks" customers, meaning that it chooses to work deeply with one promising industry participant instead of engaging with all of that customer's rivals.
"If they work with Lowe's, they won't work with Home Depot," Luria told MarketWatch. "That way they can help Lowe's win so much, they can capture a lot of that value."
Luria said that Palantir tends to choose customers with especially complex operations, because there's potentially more room to help those companies generate efficiencies with the right data and information.
That's why Luria sees compelling reasons for investors to consider shares of some of Palantir's notable customers.
One of Luria's picks is the telecommuncations company Lumen Technologies (LUMN). Lumen Chief Financial Officer Chris Stansbury told MarketWatch in an interview last month that the Palantir partnership allowed Lumen "to go pull data from disparate systems, find relationships between that data," and resolve invoice disputes in hours instead of days.
"If you look at the collection of companies that ultimately formed Lumen, the underlying technologies and backbones were never integrated," he said. That meant the company had many different order-entry systems, which complicated the process of dealing with billing inquiries.
Luria also pointed to Centrus Energy $(LEU)$. Palantir helps that company deal with the complexities of managing nuclear material, and Luria expects that as Centrus grows, the company will be able to pay Palantir a premium for helping it win in the nuclear-fuel market.
Home builder Lennar $(LEN)$ is another one of Luria's picks. Luria noted that home building is a highly competitive industry, with room to drive major efficiencies for players like Lennar that have complicated supply chains and widespread operations.
Other intriguing Palantir customers are Lear $(LEA)$, a company that designs automotive electrical systems and seating, as well as Voyager Technologies $(VOYG)$, a defense- and space-technology company, according to Luria.
Palantir's stock trades at 108 times forward earnings expectations, compared with 63 times expected earnings for Centrus Energy, about 14 times for Lennar and about 8 times for Lear, according to FactSet.
Lumen and Voyager both have negative earnings but trade at 0.6 times and 5.9 times estimated forward sales, versus 46 times for Palantir.
Luria emphasized that Palantir's practice is highly unique relative to other software companies, which are focused on doing business with as many companies as possible, without leveraging contracts to cost savings.
"Usually software companies say, 'You're going to pay me $5 million dollars a year,'" Luria said. "Palantir goes in and says, 'I'm going to save you $1 billion. And out of that $1 billion, you're going to pay me $200 million.'"
The company's ability to generate such meaningful cost savings precisely relates to its selectivity, according to Luria, since the impact would be less pronounced if all of a customer's rivals were using the same tactics.
Emily Bary contributed.