Forget Government Contracts: 1 Metric in Palantir's Q3 Report That Really Matters

Palantir Technologies (NASDAQ: PLTR) was long associated with government contracts -- and for good reason. For most of the company's 20-year history, government contracts made up the lion's share of its business, and it relied on these deals for growth. Palantir makes software that helps its customers aggregate their data and make better use of it -- and it's been useful for government departments to gain in efficiency and boost operations.

Though the government business remains important for Palantir, another area has emerged as a true game-changer for the company. This particular business has actually surpassed the U.S. government one over the past four quarters, suggesting that it has become the element that will fuel growth in the coming quarters too. So, forget government contracts: Let's check out this one metric in Palantir's quarterly report that matters the most.

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Palantir and the government

Before diving in, here's a quick look at the Palantir story so far. As mentioned, this company's software has helped its customers use something valuable that they already own -- their data -- to improve their operations or even launch innovations. In Palantir's earlier days, the U.S. government recognized the importance of this technology and put it to use, and that helped the company progressively develop its platforms and grow revenue.

But business truly took off a couple of years ago when Palantir added artificial intelligence (AI) to its repertoire. The company launched Artificial Intelligence Platform (AIP), a system integrating AI with its data analysis capabilities -- from this point, revenue surged, and importantly, a new source of growth took shape.

And this leads me to the metric in Palantir's quarterly report that really matters. I'm talking about revenue from the commercial customer -- in the third quarter, it surged 73% to $548 million. U.S. government revenue, still climbing in the double-digits, reached $486 million in the period.

How has this happened? First, it's key to consider the general environment over the past few years. Companies and organizations, seeing the promise of AI, have been eager to get in on the technology and use it to solve their biggest problems. Palantir, thanks to AIP, has made this easy for them. The company holds AIP bootcamps, or trial sessions that allow these potential customers to go from zero to a use case in a matter of hours -- and this has worked wonders, resulting in many post-bootcamp signups for AIP.

From 14 customers to 500

So, Palantir came in at just the right time with just the right offer: a platform that allows customers to easily and quickly apply AI to their needs. As a result, Palantir has grown its U.S. commercial customer base from 14 about five years ago to more than 500 today, and total commercial revenue has become a key source of growth.

What makes me optimistic about this business driving gains is the pace of growth in customer count -- and the number of customers today still leaves plenty of room for this to continue. And I'm also encouraged by increases in booking value. In the quarter, Palantir closed $1.3 billion in U.S. commercial total contract value, surpassing $1 billion for the first time ever, and the company says demand for AIP has been driving growth in the U.S.

Analysts forecast that today's billion-dollar AI market may reach a value beyond $2 trillion early next decade -- this means that commercial players' interest in harnessing the power of AI may be far from over, and that should benefit Palantir.

In recent days, some investors have worried that the government shutdown that began last month and continues could impact certain Palantir contracts. This is a possibility, but it's important to note that this would be a short-term headwind -- and doesn't change Palantir's long-term story.

On top of this, Palantir no longer is as reliant on this business as it was in the past, lowering risk brought by happenings like a government shutdown. So, right now, as you evaluate Palantir's future, you may want to forget about the government contracts and instead focus on the potential of the commercial customer, one that could supercharge growth in the coming years.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.