2023-11-11 12:00:00 ET
Summary
- PLTR's new marketing approach for AIP is accelerating its top-line and customer base expansions, with the nascent generative AI market still ripe for immense growth.
- The aggressive consensus forward estimates also suggest that PLTR may generate a top and bottom line CAGR of +18.9% and +81.6% through FY2025.
- However, these developments have also triggered the stock's inflated FWD P/E valuations, exceeding its generative AI SaaS peers, likely to offer a minimal margin of safety here.
- While we believe in PLTR's long-term prospects, investors may want to wait for a moderate pullback, before adding according to their risk appetite and dollar cost averages.
- Investors may also want to note that some traders may take this chance to take most of their gains off the table, worsened by the potential volatility from the elevated short interest of 8.20%.
We previously covered Palantir Technologies Inc. (NYSE: PLTR ) in August 2023, discussing its bright prospects attributed to the robust interest income and sustainable operating scale, with its profitability target likely to be achieved.
The management had also strategically focused on short-term contracts, expanding its remaining performance obligations despite the ongoing capex optimization from the uncertain macroeconomic outlook, naturally contributing to the expansion in its top lines then.
In this article, we will be discussing PLTR's excellent prospects, thanks to the management's new marketing approach for the AIP offering, accelerating the growth in its top-line and global consumer base.
However, this development has also directly contributed to the stock's overly premium FWD valuations, compared to its historical mean and sector median, offering interested investors with a minimal margin of safety.
Even so, we maintain our Buy rating, since we believe that PLTR may be a market leader with the global generative AI SaaS market still at the nascent stage of massive adoption. Investors may want to wait for a moderate pullback for an improved margin of safety.
PLTR Is Too Expensive Here
For now, PLTR has recorded a double beat FQ3'23 earnings call , with revenues of $558.16M (+4.6% QoQ/ +16.8% YoY) and EPS of $0.03 (+200% QoQ/ +150% YoY).
With a robust Net Retention Dollar of 107% in FQ3'23, it is apparent that its offerings are highly sticky and low-friction, with an even greater demand now, thanks to its new go-to-market boot camp approach for AIP.
With the company aggressively planning over 140 boot camps in November 2023 alone, it is unsurprising that we have already seen great results in its commercial revenues of $251M ( +8.1% QoQ / +23% YoY) and customer count of 330 (+9.2% QoQ/ +44.7% YoY), with an impressive 102 US-based deals closed in the quarter alone (+65% QoQ).
PLTR's growth in the government segment proves to be excellent as well, with revenues of $308M (+1.9% QoQ/ +12.4% YoY) and 123 government clients (+3.3% QoQ/ +12.8% YoY), mostly concentrated in the US.
These developments have partly contributed to its growing backlog of $988M (+2% QoQ/ -21.2% YoY), mostly in the stable short-term performance obligation of $560M (inline QoQ/ YoY) by the latest quarter.
This further exemplifies our thesis that PLTR remains well poised for growth, given how more and more global companies/ government agencies continue to expand their contracts with the company, thanks to its extremely useful SaaS offerings.
Looking forward, we expect to see increased AIP adoption across commercial and government markets, likely to boost its top and bottom lines over the next few quarters, if not years.
PLTR Valuations
On the other hand, the PLTR stock may not be suitable for everyone, due to the secretive and sensitive nature of its contracts, especially attributed to the use of its offerings in warfare .
In addition, the stock appears to be expensive across most of its valuation metrics, particularly in its FWD P/E valuation of 74.73x, compared to the its 1Y mean of 54.24x and sector median of 21.60x.
The PLTR stock's premium also exceeds its generative AI SaaS peers, such as Nvidia ( NVDA ) at 42.73x, CrowdStrike ( CRWD ) at 68.47x, and Microsoft ( MSFT ) at 32.46x.
While the company has reported GAAP net income profitability of $71.51M (+154.2% QoQ/ +157.7% YoY) in FQ3'23, investors must also note that part of it is attributed to its interest income of $36.86M (+21.6% QoQ/ +565.3% YoY), thanks to the robust cash/ equivalents of $3.28B (+5.8% QoQ/ +33.3% YoY) and elevated interest rate environment.
While the management has moderated its rate of share dilution, investors may want to note its growing share count of 2.32B (+0.05B QoQ/ +0.25B YoY), with its stock-based compensation of $114.38M (inline QoQ/ -18.4% YoY) still relatively elevated compared to its top-line of $558.16M.
As a result, it is unsurprising that PLTR's GAAP EPS of $0.03 (+200% QoQ/ +150% YoY) has been underwhelming to us, in our opinion - undeserving of the stock's inflated P/E premium.
If any, the only bright spot in its financial performance is its growing Free Cash Flow generation of $131.88M (+52.8% QoQ/ +304.2% YoY) and FCF margin of 23.6% (+7.4 points QoQ/ +16.8 YoY) by the latest quarter. This implies that the company may remain debt free moving forward, no matter its rapid growth trend.
Then again, we are not certain if this development means that the PLTR stock deserves an eye-watering FWD Price/ Cash Flow of 71.79x, compared to the sector median of 19.42x, NVDA at 44.14x, CRWD at 43.49x, and MSFT at 28.42x.
The Consensus Forward Estimates
Based on the consensus FY2023 adj EPS estimates of $0.25 and its premium P/E valuation of 74.73x, it appears that the PLTR stock is trading near to its fair value of $18.68 as well.
Moving forward, we concur with the aggressive consensus forward estimates, with PLTR likely to achieve its top and bottom line CAGR of +18.9% and +81.6% through FY2025. This is attributed to the robust demand for AIP and increased cross selling for other products, building upon its hyper-pandemic top-line growth at a CAGR of +36.9%.
Assuming that the stock is able to sustain its premium P/E valuations, we suppose that there is an excellent upside potential of +45.8% to our long-term price target of $26.90 as well, based on the consensus FY2025 adj EPS estimates of $0.36.
So, Is PLTR Stock A Buy , Sell, or Hold?
PLTR 3Y Stock Price
On the one hand, PLTR has already rallied by +23.9% since the recent earnings call, with it remaining to be seen if it is able to maintain this gain, since the stock has exhibited the same rip and fall pattern after the FQ2'23 earnings call in August 2023.
On the other hand, we are not so bearish as to suggest a potential breach of its critical support levels of $14s, due to the immense bullish support the stock has enjoyed since May 2023.
Based on the push factor of uncertain macroeconomic outlook and the pull factor of the robust generative AI demand, we may see the PLTR stock trade sideways at current levels, until market sentiments improve.
As a result of the reduced margin of safety at current levels, while we continue to rate the PLTR stock as a Buy, interested investors may want to wait for a moderate retracement to its support levels of $14s for an improved upside potential.
Interested readers may also want to know that we will be nibbling upon a moderate pullback, adding to our modest position since the November 2022 bottom .
However, investors must temper their near-term expectations, since it is uncertain if the PLTR stock is able to sustain its premium P/E valuations, with a hard landing increasingly likely as the inflation remains overly sticky.
Therefore, they may want to size their portfolios according to their risk appetite, especially since some traders may take this chance to take most of their gains off the table. The stock will likely remain volatile as well, attributed to its elevated short interest of 8.20% at the time of writing.
Only time may tell.
For further details see:
Palantir Is Too Rich Here - Wait For A Pullback