Of everything in Palantir Technologies' (PLTR 1.38%) annual report, this line at the top of its competition section may be the most telling: "We are fundamentally competing with the internal software development efforts of our potential customers."

In other words, when Palantir goes into a sales meeting, it's not competing against big tech companies or other software-as-a-service platforms, but in-house efforts to build something similar to its own data analytics platform. The company goes on to say, "Organizations frequently attempt to build their own data platforms before turning to buy ours."

On its earnings calls, management regularly tells stories of failures in the government to develop proprietary software, leading to agencies embracing Palantir. Its platform has become a favorite in the Trump administration, used by the Department of Government Efficiency (DOGE), Immigration and Customs Enforcement (ICE), and other agencies.

As its stock soared, that statement at the top has become more of a curiosity. Palantir was the best-performing stock on the S&P 500 last year and is the top performer so far this year as well. Typically, success attracts competition, and while it does face some, it seems to be less of a factor than it should be. Let's look at two potential reasons.

Image source: Getty Images.

A desire to avoid controversy

These days, Palantir is known for its soaring stock price, but the company also has a long history of courting controversy because it has enabled government surveillance that earned it criticism in some corners.

For example, earlier this year, 13 former employees signed a letter condemning the company for contracting with ICE in order to provide "near real-time visibility" into how migrants move across the country.

Other criticism has focused on privacy concerns, including what some cite as its creation of a sort of digital ID on Americans. The Trump administration chose it to help federal agencies share information by putting a host of personal data on its platform. Ahead of the company's initial public offering in 2020, Amnesty International said Palantir was failing in its responsibility to protect human rights.

Big tech companies like Alphabet, Microsoft, and Amazon already compete with it in some capacity and have the wherewithal to develop similar analytics platforms. But a desire to avoid the controversy that has swirled around Palantir may be restraining them so far.

All three of those big tech companies have huge consumer-facing businesses and would be loath to jeopardize those for a much smaller prize. Amazon, for example, was forced to discontinue some features of its Rekognition facial recognition technology and banned police use of the technology. Alphabet's Google is also no stranger to controversy around data privacy, given its extensive ad targeting and data sharing.

With these companies already facing antitrust threats, avoiding controversy around data privacy and surveillance is probably a smart move.

Palantir is still (relatively) small

Companies often attract competition as they grow, but Palantir's market cap, which is now above $400 billion, belies the actual size of the business.

It just reported its first quarter of $1 billion in revenue and is now targeting slightly more than $4 billion. That's a sizable business, but it's not enough to attract competition from the likes of Alphabet, Microsoft, or Amazon, which are on track to generate roughly $1.5 trillion in combined revenue this year.

And since the company primarily competes with the internal software development efforts of its customers rather than other established software companies, that also works to its advantage: It's not taking market share from a competitor that will respond to the threat.

Its biggest test is coming

Palantir just reported another blockbuster quarter with revenue up 48% and an operating margin of 27% as measured by generally accepted accounting principles. And its guidance calls for that momentum to continue.

Those kinds of results attract attention, and as Palantir grows, it's likely to receive more competition from larger tech companies. It may have to reach $5 billion or even $10 billion a quarter in revenue, but it will eventually hit a tipping point.

That's when we may discover if its technology is superior enough to withstand any challenges from big tech. Management seems to believe that's the case, but so far, Palantir has benefited from a relatively open playing field.