2023-11-09 12:48:22 ET
Summary
- Palantir's strong fundamentals in the AI sector make it a positive long-term investment despite being overbought in the short term.
- The company's significant presence in the healthcare sector and its ability to address the unique needs of different sectors indicate growth potential.
- Palantir's leadership in AI innovation, strategic mastery, and profitable progression contribute to its growth and financial health.
- Technical analysis implies that PLTR could reach $21.40 in the upcoming weeks amidst high volatility.
Investment Thesis
Since our last coverage , Palantir Technologies Inc. (PLTR) has continued navigating a complex market landscape of challenges and opportunities.
PLTR, while technically overbought, still holds a positive long-term outlook due to its strong fundamentals in the AI sector. Investors should be prudent in the short term, looking for a potential entry point if the stock corrects to between $12.55 and $14.95, mainly if the RSI falls towards 30.
Long-term bullish investors might see any dips as buying opportunities in line with Palantir's growth potential. The investment strategy now calls for a tactical approach, balancing near-term market signals with the company's enduring strengths.
A quick throwback: Despite the revisions in growth estimates for the company, we have repeatedly emphasized Palantir's superiority driven by its solid competitive advantage and growing moat.
Roughly a year ago today, the sentiment surrounding the stock was pessimistic, which was probably the best time to start building a position as many analysts and banks were issuing sell recommendations and cutting their price targets for the stock.
Thus, since the stock found a bottom last year, I doubled down on my position. Fast forward to today, it's hardly surprising to observe a shift in perspective among many Wall Street analysts, who are now revising their target prices upward, eager not to miss the turn of the tide.
Author's Thesis 17 Nov 2022
Pervasive Influence: Leading the Way in Healthcare and Beyond
To begin with, Palantir's significant presence in the healthcare sector is a crucial driver of its growth. Palantir's software is used by 16% of hospital beds across the US, a significant increase from just 1% a year ago. This widespread adoption in the healthcare sector indicates the scalability and adaptability of Palantir's products to address the unique needs of different sectors.
The healthcare sector, in particular, represents a significant growth opportunity for Palantir. Healthcare organizations increasingly rely on data-driven decision-making for patient care, resource optimization, and research. Based on this edge, Palantir may capitalize on the robust growth ( +23% annual) of the healthcare analytics market.
Fundamentally, by capturing a significant share of hospital beds, Palantir establishes a strong presence in a sector with immense data-related challenges, including patient management, medical research, and resource allocation. Therefore, with its software being adopted in various industries, including energy, finance, hospitality, and healthcare , Palantir is well-positioned for further expansion into other sectors.
verifiedmarketresearch.com
Palantir's Strategic Mastery: Leading AI Innovation Across Industries with AIP and FedStart
Additionally, Palantir is ranked as the #1 vendor in 2023 AI, Data Science, and Machine Learning. Being the leader in the field boosts the company's ability to attract more customers looking for industry-benchmark solutions. For instance, Palantir's Advanced Integration Platform ((AIP)) is used by nearly 300 organizations across various sectors, including energy, finance, hospitality, and healthcare. This diversification is a clear indication of the versatility of their offerings.
Notably, the introduction of AIP and FedStart demonstrates Palantir's focus on innovation and customer-centric solutions. AIP was launched five months ago and is already used by nearly 300 organizations across various sectors. It enables organizations to accelerate their development and innovation, leveraging Palantir's experience delivering to government agencies.
Similarly, Palantir's FedStart program, which transforms the usually lengthy and expensive accreditation process into something that can be done in as little as six weeks and at a fraction of the cost, is a significant value proposition. Government contracts can be lucrative but often come with complex compliance requirements. By simplifying this process, Palantir is attracting government clients and making it easier for them to partner with smaller businesses and startups.
The ability to rapidly launch and scale products like AIP showcases Palantir's agility and responsiveness to market demands. It is a strategic advantage that allows Palantir to weather economic downturns in one sector while thriving in another. Diversification in terms of sectors and customers also reduces the company's reliance on any single industry, ensuring stability and growth even in changing market conditions. By focusing on solving specific organizational challenges, Palantir tailors its products to address critical pain points effectively. This customer-centric approach is a key driver of the company's growth.
palantir.com/offerings/fedstart
Palantir's Profitable Progression: Stellar Q3 Performance Sets Stage for S&P 500 Inclusion
In Q3 2023, the company reported a 17% year-over-year growth in total revenue, primarily driven by its US commercial business acceleration, suggesting that Palantir is effectively capturing a larger market share.
Specifically, Palantir has shown remarkable revenue growth originating from its top 20 customers over the years, with a 13% year-over-year increase in TTM revenue per top 20 customers from Q3 2022 to Q3 2023. During 2023, Q2's revenue was $48 million, which increased to $54 million in Q3, highlighting the company's ability to generate increasing value from its top customers.
Q3 2023 Business Update (investors.palantir.com)
Towards the bottom line, Palantir's adjusted gross margin increased from 80% in Q3 2022 to 82% in Q3 2023. This demonstrates their ability to maintain and even improve their profitability while expanding their business. Thus, improved margins indicate resource allocation and cost management efficiency, which are crucial for long-term growth and sustainability. The company achieved a margin of 29% in Q3 2023 for adjusted operating income for the third consecutive quarter.
Notably, the company's attainment of GAAP profitability for the fourth consecutive quarter is a critical indicator of its financial health. Palantir's Q3 2023 GAAP earnings per share of $0.03 represents a marked improvement (up $0.09 Y/Y). Furthermore, with Q3 profitability, Palantir has attained eligibility for S&P 500 inclusion.
Letter to Shareholders (Palantir)
In terms of liquidity, Palantir's financial strength is underscored by its strong liquidity position. The company ended Q3 2023 with $3.3 billion in cash, US treasury securities, and no debt. Specifically, Cash from Operations in Q3 2023 boosted nearly 2X to $133 million from Q3 2022 $47 million.
Similarly, Adjusted Free Cash Flow grew to $141 million in Q3 2023 (increased nearly 3X) from Q3 2022 $37 million. This financial stability provides them with the resources needed for further investments, acquisitions, and expansion. Therefore, the financial flexibility allows Palantir to continue to invest aggressively in AIP and the US while driving operational leverage at scale and insulating the company from financial shocks or downturns, allowing it to weather economic uncertainties and continue its growth trajectory.
Palantir's positive outlook and guidance are strong indicators of its growth potential. For Q4 2023, they expect revenue to be between $599 million and $603 million (~18% year-over-year and 7% sequential growth), with adjusted income from operations between $184 million and $188 million.
Finally, they have raised their full-year 2023 revenue guidance to between $2.216 billion and $2.220 billion (~16% YoY growth) and their adjusted income from operations guidance to $607 million and $611 million.
Meteoric Rise: Surging Customer Counts and Breakneck US Commercial Expansion
The overall customer count also reflects strong growth, increasing by 34% year-over-year. At the end of Q2, Palantir had 337 customers, and by the end of Q3, this number had grown to 453 , demonstrating Palantir's ability to attract and retain customers effectively.
The growth in commercial customer count is particularly impressive, with a 45% year-over-year increase from 228 at the end of Q3 2022 to 330 at the end of Q3 2023. Commercial customers are a significant revenue source for Palantir, and this expansion away from government-based revenue concentration indicates that the company is successfully attracting and serving a broader range of businesses.
Fundamentally, the company's ability to attract new customers and maintain existing ones underscores its strong value proposition. Moreover, closing 80 deals of at least $1 million during Q3, including 29 deals of at least $5 million and 12 deals of at least $10 million, demonstrates the attractiveness of its solutions to large enterprises and organizations.
Securing large deals and maintaining customer growth represents Palantir's ability to deliver value consistently. Also, the company's emphasis on expanding customer relationships is evident through its net dollar retention of 107% in Q3 2023, excluding the recent acceleration of US commercial business.
On the other hand, Palantir's Q3 2023 financials reveal a substantial acceleration of its US commercial business. The Total Contract Value (TCV) for the US Commercial segment was $252 million, showing a remarkable 55% year-over-year increase on a dollar-weighted duration basis. This indicates that the company is securing more significant and longer-term contracts in this segment, which can lead to stable and predictable revenue.
Lastly, the US Commercial Revenue increased by 33% year-over-year and 13% quarter-over-quarter, demonstrating consistent and substantial growth in this critical revenue source. Palantir closed 102 US Commercial deals during the quarter, showing a 65% quarter-over-quarter increase. This level of deal activity reflects the company's ability to secure and onboard new customers in a short period, indicating strong demand for its offerings.
Finally, the 10x growth in the 3-year US Commercial Customer Count underscores the company's ability to attract and retain new customers over an extended period. The 37% year-over-year and 12% quarter-over-quarter growth in the US Commercial Customer Count further validates Palantir's ability to expand its customer base in this segment.
RPO and Billing Rollercoaster: Commercial Headwinds in Europe
Palantir's total revenue performance obligations (RPO) and billing figures reveal a negative trend in backlog. Long-term RPO decreased from $699 million in Q3 2022 to $428 million in Q3 2023. However, billings increased from $509 million to $550 million over the same period but decreased sequentially.
In Q3 2023, Palantir's short-term RPO has maintained stability. However, the numbers also underscore the challenges faced by the company's commercial operations in Europe, particularly affecting the value of contracts initiated before the previous year.
Technical Take: New Bulls Need to Wait
Palantir's stock is situated near the upper boundary of its ongoing price consolidation range, making it less favorable for long positions. Also, the RSI has exhibited a bearish divergence in the overbought territory (above 70).
On the positive side, amidst high volatility, the stock could reach $21.40 in the upcoming weeks, allowing bullish investors to maintain their positions. From a long-term perspective, a bullish outlook remains valid based on solid fundamentals. On the downside, there is a possibility that the stock may hit $14.95 in the coming weeks, offering an attractive entry range between $12.55 and $14.95, particularly when the RSI approaches 30.
This rationale is motivated by anticipating a potential downtrend due to a price gap resulting from heightened market enthusiasm over Q3 earnings last week.
Takeaway
Palantir stands out in its Q3 2023 performance, showcasing significant growth, especially in the healthcare analytics sector. Its expansion into various industries and the successful deployment of innovative platforms like AIP and FedStart underline the company's adaptability and customer-centric approach.
Financially, Palantir demonstrates robust revenue growth, increased customer acquisition, and a solid liquidity position, indicating strong market confidence. Finally, despite some challenges in the European market and cautious investor sentiment, Palantir's strategic positioning and positive outlook suggest it is well-equipped to continue its growth trajectory in data analytics.
For further details see:
Palantir: Why I Keep Holding On