1 Key Reason Palantir Stock Has the Potential to Be the “Next Nvidia Stock”

Palantir has a business model the produces recurring revenue. Companies that have such business models tend to be attractive for a few reasons:

• They can produce very high operating and profit margins.

• They can generate powerful operating cash flow margins (operating cash flow/revenue) and free cash flow margins (free cash flow/revenue).

• Their revenue streams tend to be more stable.

• They tend to have relatively low capital expenses. In the case of SaaS companies, they’re not selling a physical product, which means they don’t have to invest in manufacturing plants.

As long as Palantir keeps it existing customers happy, it should be able to count on most of them renewing their subscriptions and some of them increasing their spending on subscriptions. This is a huge positive because it’s often time-consuming and expensive for companies to acquire new customers.

Indeed, Palantir is pleasing its existing customers. In the third-quarter, its net-dollar retention rate was 118%, CFO Dave Glazer said on the company’s third-quarter earnings call. This means that its existing customers from the year-ago quarter increased their spending on its products by an average of 18% over the last year. Though, of course, Palantir is also growing by adding new customers.

Data sources: Companies’ earnings reports. MRQ = most recent quarter. Operating margin = income from operations/revenue; profit margin = net income/revenue; cash flow margins were previously defined.

I chose Microsoft as a comparison company because it’s software-focused, and known for its high profit margins and strong cash flows. In other words, it’s a tough comparison — and look how well Palantir stacks up.

One number might stick out to you — Microsoft’s free cash flow margin. The reason it is much lower than the company’s operating cash flow margin is because Microsoft has high capital expenditures. Namely, it has to invest in data centers to keep its cloud computing service business competitive.

If you’re a long-term investor, the first thing you should do when considering buying a stock is to delve into a company’s business model. You can learn a lot about its business model by just looking at how it makes its money. Of course, there are other factors to consider, such as what are its advantages relative to potential competitors? Who is the target market? How potentially big is the target market?

Companies that have subpar or just OK business models can do well over the short term, and their stocks might even soar over the short term. But the stocks of these companies are not going to be huge winners over the long term.

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Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

1 Key Reason Palantir Stock Has the Potential to Be the “Next Nvidia Stock” was originally published by The Motley Fool