2023-11-02 09:33:58 ET
Summary
- Palantir Technologies Inc. Q3 results show a beat in non-GAAP EPS and revenue, leading to a 15% pre-market increase in stock price.
- The company has achieved GAAP profitability for the fourth consecutive quarter and raised its guidance for the full year.
- Palantir's government revenue growth is slower than commercial revenue growth, and the stock seems overvalued on both sales and earnings metrics.
Palantir Technologies Inc. (PLTR) has just reported its Q3 results as covered here by Seeking Alpha. Non-GAAP EPS beat by one cent while revenue beat by about $2 million. The stock is reacting favorably pre-market, up almost 15%, although I'd like to warn that pre-market price actions are fickle and can change directions quickly, especially depending on how the earnings call goes.
My most recent coverage on this stock was a couple of months ago, arguing that the selloff caused by a downgrade was a buying opportunity. Since then, the stock has lost 1% (not including the 15% pre-market run-up this morning) compared to the market's 6% loss. A good call in hindsight? Perhaps. But let's wait and see how the day turns out.
Let us now review The Good, The Bad, and The Ugly from Palantir's Q3 2023 .
The Good
- Q3 marked the fourth consecutive quarter that Palantir was GAAP profitable. The company had famously projected that it'd be GAAP profitable every single quarter in 2023 and has so far delivered 3/3 times and appears set to be profitable in Q4 as well.
- Speaking of Q4, Palantir also raised its guidance by a hair for the full year, suggesting that Q4 is off to a good start as well. Palantir now expects full-year net income of about $610 million based on annual revenue of $2.216 to $2.22 billion. The revenue guidance is up slightly from the $2.212 billion forecast at the end of Q3. I am not sure whether that slight increase in guidance is material enough for the stock to jump up ~15% but let's evaluate that below.
- The company also announced it has now met the requirements to join the S&P 500 index (SP500). This is definitely a step in the right direction, but I had argued a while ago that the potential inclusion by and of itself is not a reason to get excited about the stock.
- I love the fact that the company remains debt-free and now has $3.3 billion in cash and short-term equivalents. That's about 10% of the company's market capitalization, and more than anything, speaks about Palantir's operating discipline.
- Speaking of operating discipline, Palantir's total operating expenses for Q3 fell more than 5% YoY despite R&D expenses going up about 5%. This means the company is investing in itself but being mindful of general administrative expenses.
The Bad
- Ask anyone with any exposure to Palantir, and the word "government" is likely to be among the top three words that they utter. Government revenue grew just 12% YoY while commercial revenue growth was almost double that at 24%. The relatively slow growth in the Government space is concerning as that segment represented 55% of Palantir's revenue in Q3. As someone who has worked with government contracts for almost 15 years, I completely agree with this assessment that one of Palantir's biggest risks is that Government contracts are "lumpy" in nature. Quite often, revenue recognition is a challenge for public companies when dealing with large Government contracts with their unpredictable schedule and delays. While the funds might be more secure in such contracts, the timing of revenue recognition is critical, and Palantir's visibility in that regard may be clouded by the very nature of Government contracts.
- From a technical perspective, Palantir stock has now (pre-market) cleared well above all the commonly used moving averages. While that is generally good news, a single swallow does not make a summer. The all-important 200-day moving average is fairly low at $12.51 (before today's price action), and investors need to be mindful that in case market condition deteriorates, Palantir may take a while before it finds strong long-term support.
PLTR Moving Avgs (barchart.com)
The Ugly
- Palantir's stock is a valuation conundrum as its future prospects are undoubtedly good with its analytics dominance and AI presence. However, the stock is overvalued on many counts, especially after the double-digit percentage increase pre-market. The stock is now trading at more than 15 times 2023's revenue and has a forward multiple of 70 using Non-GAAP EPS. While earnings are expected to grow at more than 80%/yr for the next five years, a lot of things need to fall in place for those lofty numbers to be met including but not limited to macro environment, competitive landscape, and execution.
- While the GAAP margin has been expanding every single quarter this FY, going from 1% in Q1 to 2% in Q2 to 7% in Q3 , it is quite low for a product-driven company. Products and solutions tend to have higher margins than services and once the euphoria about being "GAAP profitable" goes down, the market is likely to start questioning the margin expansion (or lack of it).
Conclusion
Palantir Technologies Inc., the company, remains a wonderful long-term story in my opinion. Q3 reaffirmed many key points of this long-term story including meaningful growth in both government and commercial segments.
For further details see:
Palantir Q3 Review: Strong Numbers But Do Not Chase