Palantir stock: The recovery will be quick (NYSE: PLTR)
At some point directly after its IPO, Palantir (NYSE: PLTR) was one of the hottest trades on Wall Street. This secret stock of machine learning and big data had become a household name and saw its shares have tripled since its debut – but unsurprisingly, Palantir has also become one of the biggest victims of the recent tech crash.
From highs above $35, Palantir has now shed two-thirds of its value, equivalent to around $50 billion in market capitalization. To date alone, Palantir stock is down 35%. While even I can’t argue that Palantir got a little hot last year and needed a slight fix, as usual the bad feeling pushed the crash too far – leaving Palantir in very deep territory. buyable.
Although Palantir has been one of the biggest holes in my portfolio this year, I remain strongly bullish on this title and I am invested for the long term. It’s hard to look at Palantir’s venerable customer base, its industry-leading suite of business and government products, and its visionary leadership and not conclude that Palantir will continue to dominate enterprise software for decades to come.
There’s been a lot of negativity around Palantir lately, but almost nothing is specific to the company. It’s about reducing portfolio risk and expensive valuations in the face of rising interest rates – which I see as short-term arguments that don’t diminish Palantir’s long-term appeal. This is a company that has claimed more than $100 billion in TAM, with its main products each adding market opportunities and becoming behemoths in their own right over time:
Here’s a look at the key elements of Palantir’s bullish thesis:
- Big Data is a massive discipline that can be applied in almost limitless ways. Palantir is not a software company that serves only one or a limited set of use cases. Data and the inferences that can be made from data are prevalent in just about everything: which is why Palantir is such a powerful tool for public and private sector clients.
- Large-scale growth. Despite annual revenue of approximately $2 billion, Palantir continues to generate revenue growth of 30-40% per year, and its long-term prospects require the company to be able to sustain growth rates. growth of more than 30% per year. until at least 2025. Few companies are able to achieve this kind of large-scale growth, and that’s a testament to the broad applicability of Palantir’s products and the huge customer base it has attracted (especially the US military).
- Acceleration of the marketing dynamic. Palantir continues to grow across a wide variety of channels. The company has ramped up its sales hires this year, a nod to the vast market opportunity it has and the need for greater territorial coverage. Palantir has also deepened its relationships with ISVs (integrated service providers) who can resell Palantir’s products without its involvement and provide additional coverage that Palantir’s direct sales force cannot manage.
- One foot in the public, one foot in the private. Palantir has made a name for itself as a major federal government contractor, but its products are equally compelling for an enterprise segment increasingly obsessed with the value of big data. Most software companies start out dealing primarily with enterprise buyers, then hopefully gain FedRAMP certification to later sell to public sector customers. Palantir did the opposite: but now, its momentum with Fortune 100 companies continues to grow, and customer additions continue to scale at an impressive rate.
- Free movement of capital. Although not yet profitable from a GAAP perspective, Palantir continues to exceed internal free cash flow expectations, which means the company is self-funding (a difference from many other fast-growing software companies that continue to need to raise capital to fund their losses).
Stay here long: Palantir is still a growth stock at the start of its transformation into a tech mega-cap.
Growth is sustained thanks to commercial progress
Palantir’s original claim to fame, and the reason it earned its reputation as the “silent silence” in Silicon Valley, is that it was the software that helped the US government hunt down Osama bin Laden. As Palantir has earned a reputation as a government contractor and government revenues and massive federal agreements continue to carve out the lion’s share of Palantir’s business, the company has been able to maintain its rapid growth rates primarily by strengthening its commercial presence.
First, on overall growth: in the fourth quarter, Palantir’s final quarter, the company grew revenue at a 34% year-over-year pace to $432.8 million, beating Wall Street expectations of 418, $1 million (+30% year-over-year) by four points. margin. The fourth quarter revenue summary is shown below:
Progress on the business side has helped index the growth rate of the business upwards. Palantir describes its enterprise software product, Palantir Foundry, as now as essential to modern businesses as Amazon AWS was to building cloud applications. Foundry is an OS (operating system) product that helps integrate data to power applications and has thousands of use cases across industries.
In the fourth quarter, commercial revenue growth in the United States accelerated for the third consecutive quarter of 132% year-on-year growth. And by the end of 2021, Palantir had 80 enterprise customers. Now, you can read that number two ways: you can be impressed that it represents 371% year-over-year growth, but you can also imagine that there is still plenty of room for expansion in the rest of Fortune. 500.
The turnover of American companies now also accounts for 13% of total turnover:
Still, the company is bracing for even more growth on the business side. He entered 2021 with a very small sales staff, having only 12 total vendors focused on US businesses. In 2021, the company made great strides in commercial hiring, which now numbers up to 80 people. More importantly, however, the company enters 2022 with 25 permanent sellers, more than four times the quarter of the previous year: allowing Palantir to cover much more scope this year than last year.
Hiring and overall growth remain a priority for Palantir leaders. As CEO Alex Karp remarked on the latest earnings call:
We’re in the market to aggressively hire in Palantir, honestly, especially not salespeople, because we believe we live and die by our ability to create tomorrow’s products delivered today.
But we’re hiring — going to hire about 200 people. Hiring them and valuing them are two different things. And so I think one of the things we’ll see in the future is how to play these vendors, so that we can get as much improvement from them as we get from the product itself. And we are at the beginning of that. And so that’s the part for people that we’ve completely indoctrinated or as normal people would say, trained, are effective, but we’ve never done that before. There will be – it’s a process, we’re also looking at ways to learn from other companies, but that’s going to happen over the next two years.”
Profitability has made huge leaps
Despite Palantir’s focus on growth, we can look at all of Palantir’s profitability metrics and see a marked improvement. Earlier in the company’s public debut, investors questioned Palantir’s large GAAP losses and concluded it was, like any other tech company, a growth-at-all-costs company. . Now we are not sure if this argument is valid.
First, a look at GAAP margins. Q4 GAAP operating margin hit a record -14%, up thirty-five points -49% in the quarter of the previous year:
Similarly, Adjusted EBITDA increased by 13 points for FY21 to 32%, thirteen points better than in FY20:
And finally, Palantir generated $424.1 million in free cash flow in FY21, representing a rich free cash flow margin of 28% – more than fifty points better than -25% in during the EX20.
The graph below also shows that, compared to many SaaS peers, Palantir’s growth balance plus FCF margin outperforms most competitors:
With this year’s market landscape so focused on safety and profitability, Palantir’s huge improvements in profitability have given investors exactly the cure for one of their biggest concerns – and yet the title slipped again.
Valuation and key takeaways
At the current share price near $12, Palantir trades at a market capitalization of $25.17 billion. After deducting the $2.52 billion in cash from the company’s most recent balance sheet, its company value jumps to $22.64 billion.
Meanwhile, Wall Street analysts are forecasting consensus revenue of $2.01 billion for FY22, representing 30% year-over-year growth (given Karp has pledged to “at least “30% growth through FY25, Palantir’s actual growth for the year is highly likely to gain several points). Yet, if we take this consensus at face value, Palantir is trading at 11.3x EV/FY22 revenue – still not cheap by any measure, but less than half Palantir’s peak multiples in the mid-20s.
I continue to view the current slide as a unique opportunity to buy a transformational technology company that is still early in its trajectory to become a tech mega-cap. Stay here long, be patient and wait for a rebound which I hope will be a quick shot to the top.