2023-11-15 07:00:00 ET
Summary
- On the back of reporting a thin beat for Q3, Palantir stock is racing toward its 52-week highs primarily due to AI optimism.
- Palantir has real AI substance as shown by the rising adoption of its AIP platform that has amassed 300+ customers within 5 months of launch.
- As of Q3, Palantir is growing at a healthy clip (+17% y/y), accelerating sales growth (Q4 est. +7% q/q), and producing tons of free cash flows (25% FCF margin).
- With all of this said, Palantir's stock is looking overstretched on an absolute valuation basis, and being a late bull here could prove to be an expensive mistake.
- In today's note, I share my take on Palantir's Q3 2023 numbers and provide a valuation update.
Introduction
On the back of delivering a top and bottom line beat for Q3, Palantir ( PLTR ) stock is once again building on its stellar year-to-date gains of >200%. Now, while Palantir's financial performance has been stronger than expected in recent quarters, the company showcasing real AI substance with Palantir AIP [artificial intelligence platform] is the primary driver of this astounding rally in my view.
Ever since it came public via a direct listing at $10 per share in late 2020, Palantir has been a battleground stock - adored by millions of retail investors and frowned upon by certain institutional money managers - akin to names like Tesla ( TSLA ) and NVIDIA ( NVDA ). Due to limited information and even less of an understanding of Palantir's technology, price discovery efforts from Palantir stock analysts, traders, and investors alike have led to massive volatility in its stock price. As of today, Mr. Market is happily paying up ~20x P/S for a business that traded at mid-single digit P/S multiples until May 2023.
Now, despite all the ups [~$45 per share in early 2021] and downs [~$6 per share in late 2022], Palantir continues to enjoy a loyal army of retail investors with nearly 54% of all outstanding shares still owned by retail.
Seeking Alpha Palantir Institutional Ownership (Fintel)
After a grueling 2021-22, Palantir's retail army has won big time in 2023, and rising institutional ownership is a sign that more and more professional money managers are starting to get on board with Palantir's AI growth story. With Palantir recording four consecutive quarters of GAAP profitability, PLTR is eligible for inclusion into the S&P 500 ( SPY ), i.e., more institutional buying could be coming down the pike soon.
In today's note, we will briefly review Palantir's Q3 2023 report and then re-evaluate PLTR's fair value & expected returns to see if joining the party here makes sense or not. Let's crunch some numbers!
Brief Review Of Palantir's Q3 2023 Report
For Q3 2023, Palantir recorded total revenues of $558M (up 17% y/y), beating consensus street estimates by ~$2M on the back of a re-acceleration in its commercial business, which just hit the $1B annualized revenue milestone.
Palantir Q3 2023 Earnings Presentation
As you may know, the strength of Palantir's commercial business was driven by robust growth in US commercial customer count (+12% q/q), which is up 10x from three years ago. According to Palantir's leadership, AIP [artificial intelligence platform] is the primary driver of this positive shift in business momentum at the company:
Deal count for our U.S. commercial business is 2.4x what it was in Q3 of last year and U.S. commercial TCV closed at $252 million, up 55% year-over-year on a dollar-weighted duration basis. We're also seeing the acceleration of larger deals and shorter times to conversion and expansion , including a multiyear deal in excess of $40 million with one of the largest home construction companies in the U.S. to start up pilot and converted all within Q3.
This growth is in part due to AIP's continued transformation of the way we partner with and deliver value for our customers, and we expect AIP's impact to continue to intensify. The rapid expansion of AIP at both our existing and new customers, and the impact it is having on their operations is nothing short of remarkable.
- Ryan Taylor, Chief Revenue Officer At Palantir
Palantir Q3 2023 Earnings Presentation Palantir Q3 2023 Earnings Presentation
The race to deploy large language models (LLMs) is in full swing, and as an enabler, Palantir AIP is just getting started on a tremendous growth journey! In a matter of months, Palantir AIP has amassed 300+ enterprise customers with a solid go-to-market approach centered around AIP boot camps, which is allowing Palantir to showcase real workflows on actual customer data within five days versus traditional pilots [1-3 months].
In the last quarter, we reoriented our go-to-market approach around AIP boot camps . We're seeing different stakeholders at the table, including tangible engagement from IT, a quicker time to value for customers, a wider range of organizations partnering with us and the ability to have multi-organization boot camps.
Early indications point to vast improvements on our unit economics from initial contact to customer conversion, all while accelerating new customer negotiations . Boot camps are also driving contract expansions. We're on track to conduct boot camps for more than 140 organizations by the end of November, nearly half of those are taking place this month alone, which is more than the number of U.S. commercial pilots we conducted all of last year.
In these boot camps, our customers attack problems that have immediate impact and learn how to deploy AI into their unique operating environment in a matter of days. Our customers' results speak for themselves. One attendee said that we achieved more in one day for them with AIP than one of the top three hyperscalers had accomplished over the last four months, and then presented their work with Palantir instead of the hyperscaler to the CEO the very next day.
Another attendee said, we basically built 10x faster with 3x less resources, and yet another claimed, we have built in a day what they wouldn't be able to get internally in months, and then it probably still wouldn't meet the requirements.
AIP is being used for a multitude of workflows at customers across the globe. Just a few examples include the following: our partners in the health care space, including Tampa General, HCA and Cleveland Clinic, are using AIP for dynamic scheduling, turning software from a place of data entry into a provider of operating leverage.
Aramark is using AI to procure more efficiently, generating custom proactive negotiating strategies. Panasonic North America is using AIP to scale its workforce and accelerate how quickly new engineers can level up. Eaton is using AIP to more efficiently deploy fixes by identifying available materials across different plants or assembly patterns. Carrefour Brazil is increasing the fill rate of online grocery orders with higher accuracy. The energy and engagement around AIP is unlike anything we've ever seen.
The potential market for AIP and the trajectory of possible AIP growth for our business is massive. We almost tripled the number of AIP users last quarter and nearly 300 distinct organizations have used AIP since our launch just five months ago. We will continue investing meaningfully in boot camps as our go-to-market strategy for AIP.
- Ryan Taylor, Chief Revenue Officer At Palantir
The hype around artificial intelligence has enamored investors, analysts, businesses, and the general public alike throughout 2023. With its robust deal-making for AIP, Palantir is showing real AI substance, and the market clearly likes what Palantir is doing in the generative AI space with the stock closing in on 52-week highs as analysts like Wedbush's Dan Ives label Palantir - "The Messi of AI".
Palantir Q3 2023 Earnings Presentation Palantir Q3 2023 Earnings Presentation
Additionally, Palantir's leadership believes that its defense/government business can also re-accelerate in upcoming quarters:
Through all of this, we never forget that we are a company built on a foundation of counterterrorism. In response to recent world events, we continue to be dedicated to our founding principles of supporting the most important missions in the world, including providing intelligence and defense capabilities to global allies. In that vein, our impact has never been more compelling. We have the products now that the world needs.
We expect our U.S. government business to reaccelerate beyond the current growth rate of 10% year-over-year, given increasing demand for those products to support our allies around the world. While we continue to expect near-term uncertainty given budgetary environments, we were encouraged by the pickup in activity at the end of the U.S. government fiscal year, and we feel well positioned for long-term growth through our evolving strategy
For Q4 2023, Palantir's management guided for revenue of $599-603M [above street estimates], positive GAAP net income, and adj. operating income of $184-188M. Furthermore, Palantir is now expected to do $2.216-2.220B in revenue for the full year 2023.
Palantir Q3 2023 Earnings Presentation
While I am excited about the trajectory of Palantir's business [AI growth story] and still expect a re-acceleration to the 20-30% y/y growth range, there are weak spots in the report that investors shouldn't overlook. For example, Palantir's RPO [remaining performance obligations] for Q3 2023 was down -21% y/y to $988M, and billings were down on a sequential basis. Since these metrics are generally indicative of future sales growth, I am not buying the "parabolic AI growth" narrative being thrown around by Palantir uber bulls on social media platforms.
Palantir Q3 2023 Earnings Presentation Seeking Alpha
Over the last four quarters, Palantir has recorded positive GAAP net income, and profits reached a record $72M for Q3 2023 [albeit half of it came from interest income]. With a robust gross margin of ~82% and rapidly improving operating margins, Palantir is turning into a free cash flow machine.
Palantir Q3 2023 Earnings Presentation Palantir Q3 2023 Earnings Presentation
As of Q3, Palantir had a cash balance of $3.3B and no debt, which is a solid financial foundation to support its AI ambitions. Overall, business momentum is building at Palantir, with the company delivering a solid mix of revenue growth and profitability. Now, let's re-run Palantir through TQI's Valuation Model to see if it's a good buy here.
Palantir's Fair Value And Expected Returns
With the growing adoption of Palantir AIP, I now have more conviction in my past prediction of Palantir re-accelerating growth back to 20-30%. As such, I am maintaining my 5-year CAGR sales growth assumption at 25%.
In recent quarters, Palantir has showcased improving margins, and I can see this trend continuing for the foreseeable future. At steady-state, Palantir could easily command 30-40% free cash flow margins. To be conservative, I am sticking to an optimized FCF margin of 35%.
All other assumptions are straightforward and self-explanatory, but if you have any questions, please share them in the comments section below.
Here's my updated valuation for PLTR stock:
TQI Valuation Model (TQIG.org)
From an absolute valuation standpoint, Palantir is significantly overvalued, with PLTR stock having a potential downside of -35% to fair value [$12.8 per share]. That said, I wouldn't dismiss the idea of investing in Palantir solely due to its premium valuation as history shows that winning stocks can be overvalued for long periods [e.g., Amazon ( AMZN ), Tesla, Nvidia, etc.]. Let's take a look at Palantir's long-term risk/reward to make an informed decision:
TQI Valuation Model (TQIG.org)
Assuming an aggressive exit multiple of 25x P/FCF, Palantir stock could rise from $19.67 to $27.43 at a CAGR rate of 6.88% by 2028. Since Palantir fails to beat my minimum investment hurdle rate of 15%, I am not a buyer at current levels.
Concluding Thoughts: Is Palantir A Buy, Sell, Or Hold?
In my view, Palantir's improving business fundamentals do not quite justify its significant valuation premium. While I believe in Palantir's AI growth story, the long-term risk/reward for PLTR stock [based on pretty aggressive valuation model assumptions] is unattractive at current levels.
From a technical perspective, Palantir is showing strong momentum as evidenced by its "Momentum" quant factor grade of "A+". That said, Palantir is getting close to "Overbought" territory (Daily RSI > 70), and a technical pullback is very much on the table. While not all technical gaps get filled, most of them do. And, as you can see below, Palantir's chart has two big technical gaps at ~$15 and ~$7.5 that look ripe to be filled.
Palantir stock chart ( Webull Desktop )
Despite scoring an "A+" on "Growth" & "Momentum" and an "A-" on "Profitability" & "Revisions", Palantir is rated a "Hold" with an overall score of 3.49/5 according to SA's Quant Rating system due to an "F" grade on "Valuation". And our latest analysis agrees with PLTR's Quant Rating.
Palantir's Quant Factor Grades ( Seeking Alpha )
At my investing group, we own a ~2.8% position in Palantir (cost-basis: $7.34 per share) within our moonshot growth portfolio. For now, we are not buyers in Palantir; however, if the stock pulls back down to 200-DMA levels at ~$12-13 per share, we will resume accumulation, i.e., slow, staggered buying.
Key Takeaway: Due to unfavorable long-term risk/reward, I rate PLTR stock a "Hold/Neutral/Avoid" at $19.67 per share.
Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.
For further details see:
Palantir Stock: The Retail Army Is Winning, But Is It Too Late To Join The Party?