2023-11-02 08:56:51 ET
Summary
- Palantir's revenue growth rates are accelerating, making it one of the few AI-related companies to see this trend.
- The company's customer count grew significantly in Q3 2023, indicating strong customer adoption and recognition of the value Palantir offers.
- Palantir's stock valuation is attractive, trading at 35 times its forward free cash flow, considering its steady growth trajectory and strong customer base.
Investment Thesis
Palantir Technologies PLTR ) specializes in developing software platforms that enable organizations to integrate and analyze their data at scale, catering to various industries including governments. Their platforms such as Palantir Gotham, Palantir Foundry, and Palantir Apollo facilitate data integration, analysis, and secure software deployment across diverse environments.
Palantir's earnings reports are always a highly charged event. And this Q3 2023 report was no different. Or perhaps it was different in that Palantir appears to be one of the few AI-related companies that is in actuality seeing its revenue growth rates accelerate, albeit marginally.
For detractors of the stock, they'll be quick to remark that stock-based compensation, or SBC, continues to be excessive. However, I don't believe investors at this point mind. Why?
Not only is this element already priced in, but the fact that Palantir is already GAAP profitable largely does away with this bearish concern.
Altogether, I continue to declare that I believe this is a good time to buy Palantir, as the stock continues to demonstrate clear end-customer diversification as well as meaningful growth opportunities.
Quick Recap
In my previous strong buy analysis , I said,
Furthermore, and most crucially, Palantir continues to be GAAP profitable and is expected to be eligible to be added to the S&P 500 index within 90 days. With inclusion to follow soon thereafter.
I then went on to say,
Since I recommended Palantir, the highly followed Palantir has been a volatile holding of mine but it has mostly moved higher. And what about right now? I remain resolute, that Palantir has some pesky aspects, including its over promotional habits and its extremely overpaid executive team.
But those detractions are more than made up by Palantir's continued progress to develop cutting-edge data mining and artificial intelligence analytics to help its customers discover patterns and derive actionable insights from complex data structures.
Palantir's Near-Term Prospects
Palantir is a software company that specializes in building platforms to integrate data and operations for various organizations.
They have developed three main software platforms - Palantir Gotham, Palantir Foundry, and Palantir Apollo. These platforms enable users to transform vast amounts of information into a cohesive data asset, with Gotham focusing on identifying hidden patterns within complex datasets, Foundry creating a central operating system for data integration and analysis, and Apollo ensuring secure and continuous software delivery across various environments.
Palantir's clientele spans diverse sectors, including government agencies, financial services, healthcare, aviation, and defense, with their software used by professionals such as intelligence analysts, clinicians, and military officials, among others.
Moving on, the most insightful aspect of this quarter's results is that U.S. commercial customer count grew 37% year-over-year, from 132 customers in Q3 2022 to 181 customers in Q3 2023.
I've stated on numerous occasions that a strong customer adoption curve, in my opinion, is more important than a company's revenue growth rate. A strong quarter can happen for different reasons. However, having customers sign in such a dramatic fashion is only because they recognize the value that Palantir offers. There's no other reason why customers sign up to a platform unless they see value.
Revenue Growth Rates Improve
Palantir upwards-revised its full-year outlook. Not by much, in the grand scheme of things, only a couple of percentage points. But in the current market environment, any AI company that is actually translating their overhyped narrative into tangible revenue growth rates is getting nicely rewarded, and that's precisely what's happened here with Palantir.
Moving on, I suspect that next year's comparables will prove much easier for Palantir. Even if in 2024, Palantir doesn't shine particularly strongly, I believe that Palantir should be able to deliver around high teens growth rates or perhaps even 20% CAGR.
For a company that reported Q2 results with 13% CAGR, for investors to now be eyeing up the possibility of 20% CAGR, this dramatically moves this narrative beyond a maturing business, to a growth business.
And growth businesses get rewarded with a growth multiple.
PLTR Stock Valuation -- 35x Free Cash Flow
Before discussing Palantir's stock valuation, I want to highlight Palantir's free cash flows.
The business is printing free cash flow. And I know that a lot of that free cash flow ends up as SBC. Nearly all, if I'm honest. But management is well aware this has been weighing on the stock.
What's more, not only is Palantir already GAAP profitable, but also, just consider how much Palantir was able to improve its underlying profitability in just 12 months.
What about by the end of 2024? I believe Palantir will exit 2024 by making about $1 billion of free cash flow.
This means that Palantir is priced at 35x next year's free cash flows. For a business that's probably growing at close to 20% CAGR, with customers with extremely deep pockets, I believe this makes Palantir a recession-resist stock worthwhile buying.
The Bottom Line
With its robust customer diversification and strong revenue growth rates, Palantir appears poised for further success, especially with its expected eligibility for inclusion in the S&P 500 Index (SP500). Despite some lingering concerns over excessive stock-based compensation, Palantir's demonstrated profitability and its impressive improvement in underlying profitability make it an enticing investment opportunity. Trading at 35 times its forward free cash flow, the stock seems attractively priced, particularly when considering its steady growth trajectory and the financial robustness of its customer base. For investors seeking a recession-resistant stock with promising long-term potential, Palantir Technologies shares present an appealing opportunity.
For further details see:
Palantir Q3 Earnings: Impending S&P 500 Inclusion, Recession-Resistant Stock