PLTR Stock Surges 40% in 2024: Buy or Wait?

AI, the pinnacle of technological advancement, has emerged as a premier investment avenue, revolutionizing mundane tasks and business operations alike. Akin to King Midas, its touch is rendering prosperity, as reflected in the soaring stock performance of top AI chip and software enterprises.

Palantir Technologies Inc. (PLTR) stands as a prime example, surging over 42% this year and a remarkable increase of more than 205% over the past year. The driving force behind the ascent extends beyond the prevailing currents of generative AI, encompassing factors such as stellar quarterly financial results that exceeded investor expectations.

A business' capacity to generate substantial cash autonomously is pivotal. It liberates the enterprise from reliance on debt or additional stock offerings for growth. The self-sufficiency catalyzes several expansion opportunities, fostering resilience and agility in navigating market dynamics.

Considering this, in its fiscal fourth quarter that ended December 31, 2023, PLTR disclosed an operating cash flow of $301.17 million, up 282.4% year-over-year.

Expanding this metric could empower PLTR to bolster its operational investments or even contemplate acquisitions. Sustained growth in cash flow would signal robust health for the company, enticing risk-averse investors to its stock. The trajectory could fortify PLTR's position and amplify its appeal in the market.

Additionally, PLRT's AI prowess is garnering momentum through the implementation of “bootcamps.” These initiatives empower both new and existing clientele to advance high-impact AI applications rapidly. The success of Artificial Intelligence Platform (AIP) “bootcamps” is amplifying PLTR’s potential market reach.

Having set a goal of executing 500 AIP bootcamps within a year back in October 2023, the company has already surpassed expectations by conducting 560 bootcamps involving 465 organizations. As per the company’s management, these bootcamps have significantly reduced sales cycles and accelerated customer acquisition.

In the fourth quarter of fiscal 2023, the company reported a doubling of new U.S. commercial deals exceeding $1 million compared to the year-ago value. Commercial revenue surged by 32% year-over-year to $284 million, whereas Government segment revenue increased by 11% year-over-year to $324 million.

While the Government segment remains the primary revenue driver, the Commercial segment exhibits significantly higher growth rates, underscoring robust momentum in this sector. The remarkable expansion is fueled by the success of its AI integration platform, highlighting its pivotal role in driving business growth.

In 2024, the company anticipates its U.S. commercial revenue to surpass $640 million, up roughly 40% from the previous year. CEO Alex Karp remains optimistic, citing "unrelenting" demand.

Future quarters will likely see investors closely monitoring the commercial revenue figure. Increases in this metric would signify successful conversion of bootcamp participants into clients, signaling the business' efficacy in capitalizing on its initiatives and expanding its customer base.

Additionally, to bolster international Commercial revenue growth, PLTR has forged strategic partnerships. For instance, PLTR has collaborated with Fujitsu to broaden its presence in Japan, facilitating the deployment of AIP and data integration capabilities in a new geographic market.

Moreover, the company is diversifying into healthcare, retail, and financial services sectors via strategic partnerships to broaden its market presence. For instance, PLTR has teamed up with SOMPO Care, a prominent healthcare insurer in Japan, to provide real-time data solutions to nursing homes and elder care facilities.

Also, PLTR has been active in the energy sector for over a decade, aiding clients ranging from small operators to supermajors and national oil companies in navigating challenges and seizing opportunities across the value chain. This includes activities from production to distribution, as well as supporting efforts to reduce carbon emissions.

That said, on February 8, PLTR and Bapco Upstream, a wholly-owned subsidiary of Bapco Energies, unveiled a strategic, multi-year partnership. The collaboration aims to implement PLTR’s software, facilitating and expediting Bapco Upstream’s endeavors to advance the next generation of energy in the Kingdom of Bahrain.

Another metric bound to attract long-term investors is a robust profit margin. In the fourth quarter, PLTR recorded a net income of $96.91 million, equivalent to 15.9% of its total revenue. This marks a notable enhancement from the preceding quarter, where the profit margin stood at 13.2%.

Sustained growth in PLTR's top line alongside a robust profit margin could lower its price-to-earnings ratio, rendering the stock a more appealing investment prospect in the future. The combination signifies a healthier financial position, potentially attracting more investors seeking value in the market.

Institutional investors are also evidently keen on PLTR shares, with 599 holders increasing their positions, totaling 118,615,063 shares. Additionally, 170 holders have initiated new positions, accumulating a total of 28,129,517 shares. The surge in institutional interest underscores growing confidence in the company's potential.

Bottom Line

Delving into PLTR's recent financial performance unveils various factors driving the sustained margin improvement. Notably, the expansion of the commercial sector, characterized by higher margin contracts compared to the government sector, emerges as a primary catalyst behind the margin expansion.

Furthermore, economies of scale and the company's commitment to responsible growth have significantly contributed to margin enhancement. With a growing contribution to revenue from the Commercial segment, PLTR appears poised for further margin expansion, solidifying its position for sustained growth and profitability.

Presently, commercial revenue signifies a substantial growth avenue, with businesses embracing AIP and harnessing PLTR's AI capabilities to leverage their data. Recent quarters' performance underscores this potential, positioning the company to potentially achieve record-free cash flow in 2024, possibly driving an increase in the stock price.

Bloomberg Intelligence suggests that Generative AI could burgeon into a $1.3 trillion market by 2032. This colossal growth potential, coupled with substantial demand for PLTR's offerings, rising sales, and profitability, underscores the company’s auspicious positioning for significant long-term growth.

Analysts project the company's revenue and EPS to rise by 17.2% and 52.2% year-over-year to $615.52 million and $0.08, respectively, for the fiscal first quarter ending March 2024.

However, a significant factor deterring some investors from the stock presently is its sky-high valuation. In terms of forward non-GAAP P/E, PLTR is trading at 72.16x, which is higher than the industry average of 25.03x. Similarly, its forward EV/Sales and forward EV/EBITDA multiples of 18.25x and 56.58x, respectively, are also higher than the industry averages.

Thus, given PLTR’s lofty valuations, investors may opt to wait for a better entry point into PLTR.

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.

 

Palantir Technologies (PLTR) Fails to Surpass Wall Street Estimates: Buy or Sell?

Artificial Intelligence (AI) has been the buzzword of Wall Street this year. The AI-driven rally has propelled the Nasdaq Composite by 33.7% year-to-date. Palantir Technologies Inc. (PLTR) has also ridden this AI wave, returning more than 180% year-to-date.

Earlier this year, PLTR announced the launch of its newest offering, Artificial Intelligence Platform (AIP), for enterprise and military applications. AIP combines the capabilities of large language models (LLMs) like OpenAI’s GPT-4 or Google’s BERT with their proprietary software to enable responsible, effective, and compliant AI advantages for defense organizations and enterprise customers.

Commenting on AIP, PLTR’s CEO and Co-Founder Alex Karp said, “AIP will allow customers to leverage the power of our existing machine learning technologies alongside…large language models, directly in our existing platforms.” In a letter to shareholders, Karp said AIP has users in over 100 organizations, including the healthcare and automotive industries, and PLTR was in talks with more than 300 additional companies.

PLTR failed to surpass the consensus earnings and revenue estimates for the second quarter. Its EPS almost aligned with the analyst estimates, while its revenue missed the consensus revenue estimate marginally. In an interview at Bloomberg, PLTR CEO Karp stated, “We have a good chance at becoming the most important software company in the world.” He said that “demand is unprecedented” for its AI platform, AIP.

For the third quarter, PLTR expects its revenue to be between $553 million and $557 million. Its adjusted income from operations is expected to be between $135 million and $139 million. For fiscal 2023, the company raised its revenue guidance. Its revenue for the year is now expected to exceed $2.21 billion. However, the latest revenue outlook for fiscal 2023 is at the midpoint of analyst expectations of between $2.19 billion and $2.24 billion.

PLTR also raised its adjusted income from operations guidance to more than $576 million. Moreover, PLTR’s Board of Directors authorized a stock repurchase program of up to $1 billion based on what the company called “transformative” traction for its AI technology.

Commenting on its second-quarter performance, RBC Capital Markets analyst Rishi Jaluria said, “Given the heightened expectations of the stock from the retail investor base around Palantir being an AI beneficiary, these are kind of disappointing numbers.” Jaluria believes that PLTR is not truly a generative AI company, and it does not have anything truly differentiated when it comes to generative AI.

He said, “This really feels like the same Palantir services and technology that they’ve been selling, which has its value. They’re not actually adding a tremendous amount of value to be a leader in generative AI, even though they are positioning themselves as such in front of the investment community and even in front of CIOs and CEOs.” He has an underperform rating on the stock and a price target of $5.

However, Wedbush analyst Dan Ives is bullish on PLTR’s AI prospects. He stated, “That’s probably the best pure-play AI name, in terms of them monetizing not just on the government side, but on the enterprise side when it comes to AI.” Wedbush maintained an outperform rating on the stock with a price target of $25.

Jefferies analyst Brent Thill believes there are several unknowns in PLTR’s business. He considers that the timing recovery of its U.S. government business, its U.S. commercial growth's durability, and its AI platform's pricing strategy could cause near-term choppiness in the financials. He has a hold rating on the stock with a price target of $17.

Here’s what could influence PLTR’s performance in the upcoming months:

Robust Financials

PLTR’s revenue for the second quarter ended June 30, 2023, increased 12.7% year-over-year to $533.32 million. Its adjusted income from operations rose 25.2% over the prior-year quarter to $135.04 million. The company’s adjusted free cash flow increased 57.7% year-over-year to $96.03 million. Its adjusted EBITDA rose 27.2% over the prior-year quarter to $143.43 million.

In addition, its adjusted net income attributable to common stockholders came in at $119.55 million, compared to an adjusted net loss attributable to common stockholders of $21.12 million. Also, its adjusted EPS came in at $0.05, compared to an adjusted loss per share of $0.01 in the prior-year quarter.
Favorable Analyst Estimates

Analysts expect PLTR’s EPS for fiscal 2023 and 2024 to increase 300% and 7.3% year-over-year to $0.24 and $0.26. Its fiscal 2023 and 2024 revenue is expected to increase 16% and 18.9% year-over-year to $2.21 billion and $2.63 billion.

Its EPS and revenue for the quarter ending September 30, 2023, to increase 500% and 17.1% year-over-year to $0.06 and $559.37 million, respectively.

Stretched Valuation

In terms of forward EV/EBITDA, PLTR’s 60.82x is 300.3% higher than the 15.19x industry average. Likewise, its 16.08x forward EV/S is 454.1% higher than the 2.90x industry average. Its 74.96x forward non-GAAP P/E is 220.9% higher than the 23.36x industry average.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, PLTR’s 78.75% is 63.4% higher than the 48.20% industry average. Likewise, its 21.35% trailing-12-month levered FCF margin is 193.3% higher than the industry average of 7.28%.

PLTR’s trailing-12-month net income margin is negative 12.87% compared to the 2.01% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 10.04% compared to the 0.23% industry average. Furthermore, the stock’s negative 5.93% trailing-12-month EBIT margin compares to the industry average of 4.48%.

Solid Historical Growth

PLTR’s revenue grew at a CAGR of 34.8% over the past three years. Its total assets grew at a CAGR of 29.5% over the past three years. Moreover, its levered FCF grew at a CAGR of 88.5% over the past three years.

Bottom Line

The buzz around artificial intelligence has helped PLTR skyrocket this year. Its recently launched platform, AIP, is garnering attention as it will allow enterprises and defense and military organizations to integrate large language models (LLMs) with machine learning and AI to aid decision-making. AIP was launched with no pricing strategy, and according to PLTR’s CEO, it is aimed to “just take the whole market.”

The company told analysts that its new AI-related pilot programs are underway, but it’s still being determined when these programs will generate revenues. Without a revenue-generating timeline from its AIP platform, PLTR could witness investor interest in its AI platform fading slowly. On the other hand, the stock trades at an expensive valuation.

Given its mixed profitability, it could be wise to wait for a better entry point in the stock.