What Does a $115M Contract Mean for Palantir Technologies (PLTR) Stock?

Palantir Technologies Inc. (PLTR), a leading data analytics company, last week announced a one-year extension of its partnership with the U.S. Army’s Program Executive Office for Enterprise Information Systems (PEO EIS) to continue powering the Army Vantage data-driven operations and decision-making platform.

The value of the contract, inclusive of options, is $155.04 million, with $97.35 million awarded and $35.60 million in initial funding. Following this news, PLTR stock briefly traded higher on Friday.

The Vantage program is a keystone in the U.S. Army’s transformative efforts to leverage data as a strategic asset, integrating data sources from within the Army and across the Department of Defense (DoD) to offer a real-time operational enterprise data ecosystem.

Under the extended agreement, PLTR will continue to provide its open data and analytics platform through the delivery of new AI-enabled capabilities and open platform infrastructures that advance the program’s evolution to the Army Data Platform vision.

Akash Jain, President of Palantir USG, said, “Building on our shared history of operational excellence and innovation, our partnership has consistently provided the Army with a decisive edge in data-driven decision-making. This extension is evidence of the value we bring to the nation’s defense, including our joint efforts to provide more commercial technology providers the opportunity to equip soldiers with the innovation they need to meet their most pressing challenges.”

Palantir, which obtains a significant portion of its revenue through government contracts, will benefit considerably from this extension of its pivotal partnership with the U.S. Army’s Vantage Program.

Following this news, BofA analyst Mariana Perez Mora maintained a Buy rating and price target of $21 on PLTR’s stock, stating that this one-year extension was unexpected.

Mora said, “The up to $115mn contract extension is in line with the annualized rate of the original contract award ($458mn), slightly below the annualized actual action obligation ($480mn) and 15% higher than Option year 2/3 average obligations. $35.6mn were obligated at the time of the award.”

“We think that PLTR has a strong position to remain a key provider of data engineering & orchestration capabilities in a growing data-centric operational strategy. The recent contract extension and the fact that PLTR can add AIP capabilities to existing offerings support our thesis,” she added.

On the contrary, William Blair analyst Louie DiPalma maintained a bearish stance on the stock, keeping an Underperform rating.

DiPalma said in a note last Friday that shares of PLTR “may start to reflect reality over the next three months once it is fully digested that the U.S. Army last night only awarded Palantir a short-term, one-year $115 million ceiling extension for Palantir’s second-largest contract on its books, the U.S. Army Vantage program.”

“When the Army originally gave Palantir the Vantage contract in December 2019, it awarded Palantir a $458 million four-year deal,” he stated. “That deal ended yesterday.”

“Not only was the duration for the new contract reduced, but the max annual run-rate was even slightly downsized from the prior $116 million revenue run-rate,” the analyst added. “Palantir will likely not even receive the $115 million as the Army announcement indicated that is just a ceiling value. The Army has a track record of only awarding Palantir less than 60% of the potential value of ceiling contracts, with Project Maven, CD1, and CD2 as prominent examples.”

PLTR’s stock has surged more than 165% year-to-date. However, the stock has plunged nearly 18% over the past month.

Let’s discuss the key factors that could impact PLTR’s performance in the near term:

Solid Last Reported Financials

For the third quarter that ended September 30, 2023, PLTR reported revenue of $558.16 million, beating analysts’ estimate of $555.92 million. This compared to the revenue of $477.88 million in the same quarter of 2022. The company’s commercial revenue rose 23% year-over-year, while its government revenue rose 12%. Its gross profit grew 21.6% year-over-year to $450.24 million.

PLTR’s customer count was 34% up year-over-year. Its U.S. commercial customer count rose 37% from the year-ago value, from 132 customers in the third quarter of 2022 to 181 customers in the third quarter of this year.

The reacceleration in the growth of the company’s U.S. commercial business is aided by the surging demand that it is witnessing from its new Artificial Intelligence Platform (AIP), which was released only months ago.  

The data analytics firm’s adjusted income from operations came in at $163.27 million, an increase of 101% from the prior year’s quarter, and represented a margin of 29%. This is the fourth consecutive quarter of expanding adjusted operation margins. PLTR’s adjusted EBITDA was $171.94 million, up 97.2% year-over-year.

Palantir’s adjusted net income attributable to common stockholders increased 864.3% from the prior year’s period to $155.02 million. The company posted an adjusted EPS of $0.07, compared to the consensus estimate of $0.07, and up 95.7% year-over-year.

Furthermore, PLTR’s free cash flow stood at $140.85 million, an increase of 285.2% from the same period last year. As of September 30, 2023, the company’s total assets were $4.19 billion, compared to $3.46 billion as of December 31, 2022.

The software maker’s third-quarter results mark its fourth consecutive quarter of profitability, meaning it is eligible for inclusion in the S&P 500. PLTR reported its first profitable quarter in February this year.

Upbeat Full-Year 2023 Guidance

After outstanding third-quarter results, Palantir raised its revenue guidance to between $2.216 billion and $2.220 billion. Also, the company increased its adjusted income from operations guidance to between $607 million and $611 million.

For the fourth quarter of 2023, PLTR’s revenue is expected to be between $599 million and $603 million. The software company anticipates its quarterly adjusted income from operations of $184-$188 million.

Revenue Growth Slowed Over Years

PLTR’s revenue grew by 47% in 2020 and 41% in 2021, with an initial forecast of at least 30% annual growth through 2025. However, in 2022, the company’s revenue growth slowed to 24%. This year, management expects a further dip with nearly 16% growth. Uneven government contract timing and other macroeconomic challenges impacted the software marker’s growth.

Benefitting From the AI Boom

In June this year, Palantir launched its Artificial Intelligence Platform (AIP), which has proven to be highly successful among corporations. This AI platform significantly enhances its existing data analytics platform along with its machine learning technologies.

Users of PLTR’s AI platform almost tripled in the July-September period, Chief Revenue Officer Ryan Taylor said.

In the five months since its launch, more than 300 organizations have signed up to use the company’s AIP. Also, Palantir is experiencing strong interest in the “bootcamps” it launched in October to provide clients access to its AI platform for one to five days, which is a positive sign for future solid demand.

According to Bloomberg Intelligence, Generative AI is expected to become a $1.30 trillion market by 2032, growing at a CAGR of 42% over the next ten years. Increasing demand for generative AI products could add around $280 billion of new software revenue.

Thus, PLTR is aggressively investing in AI to capitalize on this robust demand.

Favorable Analyst Estimates  

Analysts expect PLTR’s revenue to grow 18.5% year-over-year to $602.79 million for the fourth quarter ending December 2023. The company’s EPS for the ongoing quarter is expected to grow 89.8% year-over-year to $0.08. Additionally, the company topped the consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.

For the fiscal year 2023, Street expects Palantir’s revenue and EPS to increase 16.5% and 312.4% year-over-year to $2.22 billion and $0.25, respectively. Also, the company’s revenue and EPS for fiscal year 2024 are expected to grow 19.7% and 18.7% year-over-year to $2.66 billion and $0.29, respectively.

Mixed Profitability

PLTR’s trailing-12-month gross profit margin of 79.92% is 63.5% higher than the industry average of 48.88%. Its trailing-13-month net income margin of 3.25% is 195.5% higher than the industry average of 2.35%. Moreover, the stock’s ROCE and ROTA of 5.28% and 3.51% are considerably higher than the respective industry averages of 1.11% and 0.15%.

However, the stock’s trailing-12-month EBITDA margin of 1.71% is 64.3% lower than the 4.78% industry average. PLTR’s trailing-12-month ROTC of 0.74% is 71.5% lower than the industry average of 2.60%.

Elevated Valuation

In terms of forward non-GAAP P/E, PLTR is currently trading at 69.72x, 187% higher than the industry average of 24.30x. Also, the stock’s forward EV/Sales and EV/EBITDA of 15.57x and 54.13x are significantly higher than the industry averages of 2,89x and 15.69x, respectively.

In addition, the stock’s forward Price/Sales multiple of 16.91 is 475.8% higher than the respective industry average of 2.94. Its forward Price/Cash Flow of 66.97x is 199.7% higher than the industry average of 22.35x.

Bottom Line

PLTR beat analysts’ estimates on top and bottom lines in the third quarter of 2023. The company delivered a fourth straight quarterly profit on rising demand for its data analytics services from corporates. Moreover, the software marker’s AI offerings would aid its growth in the future.

After impressive third-quarter results, Palantir raised its revenue guidance for the full year 2023. Despite this, the company’s revenue growth slowed down over the years, from 47% in 2020 to nearly 16%, as management anticipated for this year. Also, government revenue rose 12% year-over-year in the third quarter, below the 13% recorded in the prior year.

The company blamed budgeting constraints at the government level but stated it remains optimistic about demand considering geopolitical tensions.

Recently, the data analysis firm announced that another year was added to its Vantage contract with the U.S. Army, and this extension would provide PLTR with as much as $115 million.

Following this news, analysts are divided on the impact, with William Blair analyst maintaining his long-held bearish view on the stock. On the other hand, BofA analysts maintained a Buy rating on the PLTR stock, citing that this unexpected contract extension should bode well for the company.

Given its stretched valuation, mixed profitability, and uncertain near-term prospects, it could be wise to wait for a better entry point in this stock.