Could Innodata Become the Next Palantir?

Palantir (PLTR 2.06%), a data mining and analytics firm that serves the U.S. government and large companies, went public via a direct listing on Sept. 30, 2020. It started trading at $10 and went through some wild swings, but now trades at about $29. The company impressed the bulls with its robust growth, rising profits, and the rapid expansion of its domestic commercial business, which helped reduce its dependence on rigid government contracts. Palantir's revenue rose at a compound annual growth rate (CAGR) of 32% from 2019 to 2023, and analysts forecast its revenue to increase at a CAGR of 20% from 2023 to 2026. It also turned profitable on a generally accepted accounting principles (GAAP) basis in 2023, and analysts expect its net income to rise at a CAGR of 46% over the next three years. Image source: Getty Images. Those growth rates are impressive, but Palantir's stock isn't cheap at 87 times forward earnings and 24 times this year's sales. With a market cap of $64 billion, it could also have less upside potential than small-cap growth stocks in the same sector. So today, let's take a closer look at Innodata (INOD 14.09%), a $500 million company that is expanding faster than Palantir and still looks cheap relative to its near-term sales. What does Innodata do? Innodata was founded in 1988, and it provides business process, technology, and consulting services along with software tools for creating, managing, using, and distributing digital information. It mainly serves large organizations across the government, aerospace, defense, financial services, and tech sectors. The company went public in 1993, and its revenue only grew at a CAGR of 6% from 1994 to 2019. It ended 2019 at just $1.14 per share -- representing a 32% decline from its split-adjusted IPO price of $1.67 -- as many investors dismissed it as another slow-growth IT services and enterprise software provider. But from 2019 to 2023, Innodata's revenue rose a CAGR of 12%. It expects to generate "at least" 40% organic revenue growth in 2024, and analysts expect its revenue to increase at a CAGR of 33% from 2023 to 2026. That acceleration will mainly be driven by the rollout of new generative AI services for some of the world's top tech companies. Innodata started 2024 with master service agreements in place with five of the "Magnificent Seven" companies. It anticipates it will boost its revenue from three of them this year, and it's "making significant inroads" with the other two. In other words, the expansion of the generative AI market is turning this dusty old IT services company into an exciting growth stock. That's why its shares soared 1,350% over the past five years -- but they still trade at 4 times this year's sales. But can Innodata become as big as Palantir? Innodata looks cheap relative to its sales growth, but it hasn't been profitable on a GAAP basis over the past three years. On the bright side, it squeezed out positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $5 million in 2023, and analysts expect that figure to rise at a CAGR of 64% to $22 million by 2026 as it locks in more customers and scales up its generative AI business. That's a promising outlook, but Innodata still faces plenty of competition from IT services giants like Accenture (NYSE: ACN) and digital transformation specialists like Globant (NYSE: GLOB). Its new Magnificent Seven customers could also abruptly reduce their generative AI spending if the red-hot market cools off. If Innodata meets Wall Street's target of generating $205 million in revenue in 2026 and trades at a more optimistic 10 times sales by then, it would be worth more than $2 billion. That would represent a near-four-bagger gain from its current price, but it would still be much smaller than Palantir and other bigger players in the IT services space. So while it's doubtful Innodata will become the next Palantir anytime soon, it could have more upside potential as it expands its generative AI business. That said, investors should carefully gauge the competitive headwinds, its ability to stabilize its earnings growth, and the health of the AI market before buying this speculative small-cap stock.