2023-11-02 18:14:27 ET
Summary
- Palantir beats Q3 earnings, leading to a 20% rally in the stock and increased investor confidence.
- The company is excelling in all important metrics and is considered one of the best AI plays.
- Palantir is expected to become a mega-cap within the next ten years, with potential for significant revenue growth in the AI market.
Thesis Summary
Palantir Technologies Inc. ( PLTR ) has just reported Q3 earnings , beating on both EPS and revenues. This has led to a +20% rally in the stock, as investors have regained confidence in the future of the company.
Palantir is delivering in all the metrics that matter and continues to stand out as one of the best AI plays out there.
Palantir is a long-term hold, and in my humble opinion, this will become a mega cap within the next ten years, if not sooner.
In my last article on Palantir , I highlighted the selloff ahead of earnings could be a buying opportunity while highlighting the importance of AIP, which is clearly delivering, as mentioned by Karp.
Q3 Overview
Palantir Technologies has beat expectations for the quarter and raised its revenue guidance.
Revenues came in at $558,159 million, growing 17% YoY. GAAP EPS also beat, coming in at $0,03. A surprise in both the revenue and profitability front.
For the next quarter, the company expects to achieve revenue of between $599 - $603 million and to maintain GAAP profitability.
Revenues for the full year are now expected to be close to $2.2 billion, with adjusted income from operations of over $600 million.
The metrics for Palantir just keep improving, and bears are running out of arguments.
U.S. commercial growth came in at 33%, showing just how valuable Palantir is proving to private companies and not just government agencies.
Customer count held steady, growing by 8% YoY. In a way, customer count is an even more important metric than revenue. For now, we want to see the market embrace Palantir. Revenues will come later as these companies begin to take full advantage of the company's offerings.
And lastly, the infamous stock-based compensation ("SBC"):
Though shares are still getting diluted, SBC continues to trend down and now constitutes around 20% of revenues.
Seems like all is well and good for Palantir in 2023, but what about further in the future?
2024 and Beyond
Palantir continues to deliver, and there's no reason to believe it won't keep doing this in the future.
The "AI market" is still in its infancy, and it has a lot of runway left.
According to this report from MarketsandMarkets, the AI market will grow at a whopping CAGR of 36.8% in the next 10 years. If this is indeed how the market will evolve, then Palantir could quickly be taking in tens of billions of dollars in revenue by 2030.
I'm not saying this is going to happen, but applying a 36% CAGR to Palantir's $2.2 billion in annual revenues over ten years would have the company taking in $50 billion a year.
Again, we are just scratching the surface of AI. Palantir's AIP is just getting started, and we still don't know just how far it can go.
But Karp did specifically mention the growing demand for AIP in his shareholder letter:
The reacceleration in the growth of our U.S. commercial business, the new and emerging center of our company, is aided by the growing demand that we are seeing for our new Artificial Intelligence Platform ((AIP)), which was released only months ago.
Source: Shareholder Letter .
It's definitely well beyond what I and most analysts expect, but it gives us an idea of just what is possible.
In the more immediate future, Palantir will likely benefit from being included in the S&P 500 (SP500) following a fourth straight quarter of GAAP profitability.
Furthermore, the company generated a cash flow of $140 million and has $3.3 billion in cash. The way I see it, it's also only a matter of time before shares outstanding begin to trend down, not up.
Valuation
The way I see it, Palantir will be close to a mega-cap stock by 2023.
According to analyst estimates, the company could be generating close to $10 billion by 2032.
Now, Palantir's current share count stands at $2.15 billion. While we could expect some further dilution in the next two or three years, I think that this trend will be reversing after that.
By 2032, I'd expect shares outstanding to be lower. Let's say the company manages to take this down to $2 billion.
That would mean revenue per share would be around $5. Now, if we were to apply today's P/S of around 15, that would have Palantir shares trading at $75, which would equate to a market cap of $150 billion.
Now, this is still a bit shy of the $200 billion that is required of a mega-cap stock, but it is getting quite close.
A 10-year projection is always a highly speculative endeavor. The $10 billion estimate is based on one analyst, and revenues could be very, very different. Even small changes compound over time.
In any case, this is just to get a sense of the magnitude of Palantir's potential. To me, there's no doubt that Palantir is a future mega cap in the making.
Technical Analysis
Again, long-term targets are always less reliable. But, in any case, the valuation laid out above is supported by my Elliott Wave analysis, which would have Palantir trading at close to $100 by the time we end the next rally.
Measuring the wave 1 from the bottom of what now appears to be shallow wave 2, projects us towards $99.6, which is the 1.618 ext.
Sure, this seems ridiculous now, but remember that when Palantir IPOed, it was trading at close to $40, and that was before the company had even shown it could make a profit.
Hype and emotions are powerful catalysts, and the market is not always rational. But is this price possible? Certainly.
Risks
Palantir will surely face many challenges in the future. We are quite literally in an unprecedented time and market, as we barely understand the implications of AI. There's no doubt that competition will be fierce in the coming years. Technology speeds up things, and who is to say Palantir could be displaced by superior technology much faster than we might expect?
On the other hand, part of Palantir's growth depends on international contracts. For example, the NHS contract has been a big win for Palantir. However, as geopolitical tension rises, this hurts Palantir's possibilities of working for other governments.
Takeaway
Palantir Technologies Inc. had a great quarter and continues to deliver where it matters, which the market has rewarded. While the valuation might not make sense to some, this is a company that could quite literally reshape the future. I'm in for the long haul.
For further details see:
Palantir: AI Mega-Cap Stock In The Making