2023-12-12 07:30:00 ET
Summary
- Palantir demonstrates stellar revenue growth momentum fueled by balanced growth both in governmental and commercial sectors, which improves the company's resilience.
- The balance sheet is a fortress, which means the company is strategically positioned to continue investing heavily in growth and innovation.
- My valuation analysis suggests the stock is fairly valued.
Investment thesis
My previous bullish thesis about Palantir (PLTR) aged well as the stock rallied by more than 20% over the last quarter, multiple times outpacing the broader U.S. market. Recent developments suggest that PLTR's stock's stellar 2023 run was fueled by improving fundamentals and solid external tailwinds both in governmental and commercial sectors. The company is well-positioned to absorb positive trends and its fortress balance sheet gives Palantir vast room to continue developing its products and continue delivering value to customers. Furthermore, my valuation analysis suggests that the stock trades with a slight discount, which is good because PLTR's strong growth momentum and solid operating leverage suggest the stock deserves a substantial premium. All in all, I reiterate my "Strong Buy" rating for PLTR.
Recent developments
The latest quarterly earnings were released on November 2, when PLTR topped consensus estimates. Quarterly revenue increased by 17% YoY, and the adjusted EPS increased sevenfold, from $0.01 to $0.07. The bottom line strengths were caused by robust operating leverage and not due to extraordinary events. The quarterly gross margin surpassed a stellar 80% level, and the operating margin improved from -13% to 7%.
Seeking Alpha
A strong quarter enabled PLTR to solidify its strong financial position further. As of the latest reporting date, Palantir had over $3 billion in outstanding cash with almost no leverage. Liquidity metrics are still substantially beyond enough. I always emphasize the importance of a healthy balance sheet because this indicates the management's sound capital allocation approach and strong position to finance further innovation and revenue growth. From the balance sheet perspective, Palantir looks well-rounded to continue investing heavily in innovation and build long-term shareholder value.
Seeking Alpha
The earnings release for the upcoming quarter is scheduled for February 13, 2024. Quarterly revenue is forecasted by consensus at $603 million, which indicates a strong 18.7% YoY growth. The adjusted EPS is expected to follow the top line and double from $0.04 to $0.08 on a YoY basis. It is important to highlight that there were nine upward EPS revisions over the last 90 days, which is a bullish sign.
Seeking Alpha
I support the consensus optimistic near-term forecast because AI continues gaining momentum, which we have seen from the stellar quarterly report of Nvidia (NVDA), which demonstrated a threefold YoY growth. Strong recent quarterly results from other advanced chipset makers like Broadcom (AVGO) and Advanced Micro Devices (AMD) also suggest that the AI momentum is still hot. The recent AI industry forecast update from statista.com suggests that the industry will continue booming for several years, a massive tailwind for Palantir. The fact that the company has been quite successful in absorbing favorable technological shifts so far adds conviction to me that Palantir will be able to continue capitalizing on positive secular trends. I consider the ability to deliver operating leverage as the most important factor that underlines the strength of the business model, and the recent dynamics of Palantir's operating profit suggest the management has a clear vision of how to absorb the economies of scale effect.
PLTR's latest earnings presentation
I find the positive trend in customer diversification particularly crucial. In its earlier developmental stages, Palantir leaned more toward governmental contracts. However, a notable and positive shift is evident with a substantial upswing in commercial customer growth. This evolution signifies a strengthened and dynamic customer base for the company, enhancing Palantir's resilience.
PLTR's latest quarterly presentation
A solid growth momentum in the commercial customer base does not mean the company has refocused its target audience. During the latest earnings call , the management highlighted that the company is still focused on supporting critical missions related to providing intelligence and defense capabilities. I think that from a governmental contract point of view, solid tailwinds are also behind the company's back. The world is facing a very challenging time of two ongoing harsh military conflicts in Ukraine and Israel, and all countries are becoming more concerned regarding the physical safety of their states. As Russia continues increasing its military spending, the developed world has no other option than to respond by increasing investments in defense as well. Since Vladimir Putin will run for the 2024 presidential election, the war in Ukraine will highly likely last longer which will be a strong catalyst to sustain global military spending growth. As Mr. Putin's approval rating remains sky-high, there are almost no doubts that he will win another six-year presidential mandate and the policy regarding the Russia-Ukraine war will remain unchanged.
Strong momentum in the customer base, both in the governmental and commercial sectors, suggests the high appeal of Palantir's offerings. The company continues investing massively in R&D, allocating almost one-fifth of its revenue to innovation. This increases the chances that the company's two major platforms, Gotham and Foundry, will continue delivering value and high ROI to customers. The fact that PLTR recently won a large over $400 million contract with the U.K. National Health Service underscores the technological superiority of the company's offerings.
Valuation update
The stock rallied multiple times in 2023, with a 178% year-to-date stock price increase. This performance by far outnumbered the broader U.S. stock market. PLTR has a very low "D-" valuation grade from Seeking Alpha Quant because its valuation ratios are multiple times higher than the sector median all across the board.
I want to proceed with the discounted cash flow [DCF] analysis. I use the same 10% WACC for discounting as in my previous PLTR valuation exercise. There was a slight upgrade to long-term consensus revenue estimates ; I incorporated these changes into my DCF. I did not amend the FCF expansion profile because there were no substantial changes to the revenue growth trajectory.
According to my DCF simulation, the business's fair value is slightly above $40 billion. This is not far above the current market cap, which indicates limited upside potential for the stock. However, a company like PLTR, with a strong revenue growth profile and solid strategic positioning, deserves a premium, in my opinion. The extent of a premium usually depends on the overall stock market sentiment and other factors in the macro environment, but the fact that PLTR is traded around the fair value indicates an attractive valuation for long-term investors.
Risks to consider
PLTR demonstrated a massive year-to-date rally and is not far from its fair value. I think this increases the probability of the correction for PLTR, especially as the calendar 2023 year-end approaches. This can be triggered by profit-taking or unfavorable shifts in the current uncertain macro environment. Growth companies' valuations significantly depend on the Federal funds rates. While the Fed is now in a pause regime, there is no guarantee that further interest hakes will not pop up because the U.S. economy still demonstrates strength .
In the rapidly evolving technological landscape, Palantir's ability to sustain its remarkable growth is quite uncertain. The tech sector's constant evolution challenges the company's continued success. Investors should be aware that Palantir's past and current stellar performance does not guarantee further success. As the demand for data-driven solutions grows, the company's ability to maintain its competitive edge amid intensifying competition will be vital in determining its future growth profile.
Bottom line
To conclude, PLTR is still a "Strong Buy". The company demonstrates stellar revenue growth momentum, and the business model looks highly efficient as PLTR demonstrates firm operating leverage as the business scales up. Fortress's balance sheet suggests that the company has vast financial resources to continue investing heavily in growth and innovation. The valuation looks attractive as well.
For further details see:
Palantir: AI Superstar Fairly Valued