Palantir Stock Surges Following Strong Q2 Earnings and AI Potential

Palantir Stock: Trading At Fair Price After Tech Selloffs And Strong Q2 (NYSE:PLTR)

After the major tech selloffs, Palantir (NYSE:PLTR) stocks are currently trading around their fair market price. Palantir just reported a very strong performance in the first half of 2024, both in terms of revenue growth and profitability, primarily poised by the great success of its Artificial Intelligence Platform solutions in the commercial segment. Despite the recent tech sector price corrections - as many tech firms, especially AI-focused ones, came short of analysts' expectations - the growing demand for Large Language Models (LLMs) for enterprise environments represents a major catalyst for Palantir's future growth. We expect Palantir to keep improving its market share in the software industry, primarily thanks to the expansion of its commercial segment, as more and more Fortune 500 companies adopt Palantir's solutions poised by the success of the AIP Bootcamps which notably speed up sales cycles and products' scalability. Along with greater scalability, we expect Palantir's profitability to continue to improve, bringing its operating margin to the 40+ per cent territory, which would ultimately improve the firm's ability to generate solid free cash flows. At current prices, our assumptions suggest that Palantir's risk-reward profile has the potential to represent an interesting long-term opportunity, especially for those investors willing to take some risks as tech selloffs are unlikely to be finished considering the exaggerated expectations Wall Street has on the tech sector and AI-focused stocks. In our past coverage of Palantir, we highlighted how the company was able to create a powerful moat by developing a powerful set of data-driven decision-making software solutions targeting the complex and risky needs of governments and large enterprises. Here is a quick reminder of what makes Palantir's moat: Palantir software solutions seek to solve complex and capital-intensive problems which most of its competitors refuse to solve due to the high risks involved. While this strategy forced the company to slow down scalability in the past, now that the relevance of AI solutions has been widely recognized, Palantir has a tremendous advantage over its competitors which will require years, and billions invested in R&D, before closing the gap. Despite its products are not highly scalable in terms of implementation - as Palantir requires to deploy trained "consultants" to fully enforce the platform capabilities - its solutions are highly scalable in terms of what they can do. Given the classified nature of government operations, and the high costs and chances of failure enterprises undertake with these projects, the market in which Palantir operates is characterized by higher barriers to entry when compared to the broader software industry. Palantir's solutions primarily comprise two data analytics platforms called Gotham and Foundry, where the first is dedicated to the defence and intelligence sector and the second to the commercial sector. In addition to the two main operating systems, Palantir has introduced two ancillary platforms called Apollo and Artificial Intelligence Platform (AIP). The latest introduced AIP instead, enables both Gotham and Foundry customers to integrate generative AI and machine learning capabilities into the data analytics features of the two main platforms to build large language models (LLMs) able to assist human operators in critical decision-making processes. Other than advanced big data analytics capabilities, Palantir's solutions can rely on powerful security frameworks which grant its customers the highest level of safety and privacy on their data. Palantir's solutions can rely on granular access controls, such as role, temporal, and purposed-based access controls; sensitive data management, to securely analyse sensitive data; oversight and auditability, ensuring the appropriate use of data in compliance with current regulations and audit logs to investigate potential past misuse of data; and data retention, deletion, and provenance controls. Palantir's customer base accounts for 593 customers, with the top three customers together accounting for 18% of total revenues. Despite the small customer base, due to the complex and capital-intensive nature of Palantir's solutions, the firm targets high-spending clients with the top 20 customers average revenue contribution equal to $54.6 million, growing 11% y-o-y from the average $49.4 million registered in 2022, indicating Palantir's ability to upsell and cross-sell its already existing customers. Revenues are generated under a subscription model to access the software platforms from Palantir's hosted environment - called Palantir Cloud - or customers' already existing cloud environment, called On-Premises Software. However, due to the complexity of its products under both subscription models, it included the obligation to deliver ongoing operations & maintenance (O&M) services, by deploying software engineers and architects to ensure the effective and efficient implementation of its solutions. In 2023, and in the six months ended June 2024, 55% of revenues were derived from government customers, and the remaining 45% from commercial customers. Palantir, with its $2.2 billion in revenues in 2023, has established a niche presence in the software industry, representing 0.4% of the industry's total revenues of $635.1 billion. The software industry is moderately concentrated registering a Herfindahl-Hirschman index (HHI index) of 14.5, or 1.447 points. The Herfindahl-Hirschman index is used to measure the level of competitiveness/concentration in an industry with an HHI below 0.15 (or 1.500 points) indicative of competitive industries while an HHI between 0.15 and 0.25 (or 1.500 and 2.500 points) indicative of moderately concentrated industries. Despite the relatively small market presence, Palantir's solutions enjoy an incredible moat in their target niche markets as few companies have the capacity to embark on such complex and capital-intensive projects. And if they are willing to compete in this market, it will require years and huge losses before obtaining the go-ahead from governments and large enterprises. From 2013 to 2023, the software industry's revenues grew at a CAGR of 10.4%, increasing 2.7 times from $235.3 billion to $635.1 billion. The blossom of the internet at the beginning of the 21st century and the mass adoption of cloud computing have been two major drivers for the rapid expansion of the software industry. Nowadays, given the ongoing digitalization trends and sprout of AI technologies, software solutions are embedded in people's everyday lives more than ever. Considering the collective investments made by software companies through the years, to support future growth, the 2024 expected growth rate for the industry is 14.07%. We projected the industry's expected revenues 10 years from now, applying the expected growth rate of 14.07% and allowing it to slowly decline as the industry approaches the economy's perpetual growth rate, represented in this case by the USD risk-free rate. By 2033, the software industry revenues are expected to reach $1.4 trillion, increasing 2.2 times from the $635.1 billion registered in 2023 at a CAGR of 8.2%. Over the period 2018-2023, Palantir's revenues grew at a CAGR of 30.2% increasing 3.7 times from $595 million to $2.2 billion, while its market share improved from 0.2% to 0.4%. Despite the government segment still maintaining strong momentum - up 20% as of June 2024 - the commercial segment - 30% in the first half of 2024 - is the main driver for the firm overall revenue growth. The recently reported Q2 results further emphasize the solid momentum in the commercial segment, with revenues up 33% Q2-o-Q2, while when looking at the core US commercial customers, revenues are up an astonishing 55% Q2-o-Q2. As more and more Fortune 500 companies realize the benefits of Palantir's Foundry, we can reasonably expect commercial revenues to ultimately surpass the government segment in terms of total contributions to the firm's top line. Palantir's business model notably reported slow sales cycles and slow scalability, primarily due to the complexity of its solutions often sold after pilot programs to allow customers to understand their true capabilities, as reported by the management: The length of our sales cycle, from an initial demonstration of our platforms to sale of our platforms and services, tends to be long and varies substantially from customer to customer. Our sales cycle often lasts six to nine months but can extend to a year or more for some customers. However, with the introduction of AIP Bootcamps, the firm managed to remarkably speed-up sales cycles. The purpose of these Bootcamps, usually lasting no more than 5 days, is showing to customers the capabilities of AIP solutions integrated with Foundry and Gotham. Potential Customers have the opportunity to prove Palantir's solutions beforehand and try solving their business issues using their data. In the Q1 earnings call the management reported the success of this initiative saying: ...We've sustained our high volume of Bootcamps with over 915 organizations...We are also seeing substantial deal cycle compression...A leading utility company signed a 7-figure deal just 5 days after completing a boot camp. Another customer immediately signed a paid engagement after just one day...and then converted to a 7-figure deal 3 weeks later. Along with the ever-growing interest in AI solutions, the commercial segment is expected to greatly benefit from the rediscovered scalability of its solutions. We expect Palantir's market share to improve to 1.4% by 2033, primarily driven by the expansion of the commercial segment, both in terms of market share and overall revenue contribution. The government segment is expected to continue to contribute with solid revenue growth sustained by the more stable and long-term government contracts. With these assumptions, Palantir's revenues are projected to reach $19.4 billion by 2033, representing an increase of 8.7 times from the 2023 revenues of $2.2 billion at a CAGR of 24.2%. Until 2023, Palantir struggled to turn its business model profitable, however since the outbreak of generative AI models at the end of 2022, the firm found itself positioned perfectly to benefit from the upcoming adoption of LLMs at the enterprise level, quickly turning its income from operations positive. When treating R&D as operating expenses, Palantir's 2023 operating margin is a mediocre 5.4%, however, when treating R&D as capital expenditures - as they generate returns in future years - the 2023 operating margin adjusts to 15%. In the first half of 2024 instead, when capitalizing R&D, the reported operating margin of 14% is projected to adjust to 35%, significantly higher than the software industry median operating margin of 25.3%. As Palantir scales its operations and increases its market share, we expect the adjusted operating margin to improve from 35% in 2024 to 45% by 2033 - roughly in line with top-notch software companies adjusted operating margins like Salesforce and ServiceNow which we recently covered. The complexity and ability of Palantir's solutions to solve problems no other company dare to solve grants the firm remarkable contract powers over its customers enabling it to maintain high margins -a 10-year median gross margin of 78% - despite the low scalability of its products and the need to deploy trained software engineers to fully implement its solutions at client sites. Along with improved operational profitability, in 2023 the firm managed to deliver positive free cash flows to the firm of $134 million - calculated as adjusted net operating profit minus net Cap. Ex., acquisitions, and net R&D expenses - and equal to an FCFFs margin of 6%. Projecting FCFF margins into the future, we expect them to improve to 25% by 2033 - again in line with our assumption for Salesforce and ServiceNow - with reinvestment needs remaining around an average value of 12.3%. We expect Palantir to significantly improve if free cash flows, while maintaining relatively low reinvestment needs, as it can capitalize on its already existing powerful big data analytics platform developed over the past decade without necessitating investing billions in R&D and acquisitions to develop new cutting-edge technologies. Pioneering the machine learning and AI industry way back in 2003, Palantir can now reap the benefits of its decades-long investments. With these assumptions, Palantir's FCFFs are projected to reach $4.8 billion by 2033, representing an increase of 36.1 times from the 2023 FCFF of $134 million at a CAGR of 43.1%. Applying a discount rate of 9.5% for the next 10 years and in perpetuity, we obtain that the present value of these cash flows - after adjusting for debt and cash on hand - is equal to $52.5 billion or $23.6 per share. Compared to the current prices, Palantir stocks are correctly valued. The street target for Palantir - based on 16 different analyst expectations - is sitting at $23.1 per share, as of the 6th of August 2024, with 5 street recommendations expressing the rating "Hold", 4 recommendations rating it a "Buy", and 4 giving it the rating "Sell". Looking at the trading seasonality trend for Palantir, a chart that shows for each month of the year the likelihood that the end stock price will be higher than the start price based on historical data, in the last 6 years, in August, Palantir stock prices have gone up/down on average only 25% of the times, with a mean change of negative (9.1%), a high of 21.33%, and a low of (24.5%). Among all months, August on average has been one of the worst months for Palantir. However for a long-term investor, willing to take some risks, it might indicate a sound entry point to start building a position in the company and benefit from a potential comeback in the later part of the years. To determine the appropriate discount rate, we employ the WACC method, which considers both the cost of equity and the cost of debt. The cost of equity - 9.5% - is derived using the USA equity risk premium of 4.5% - as of July 2024 - the current USD risk-free rate of 4.2%, and the company's beta of 1.19. The company's beta is based on the software industry's unlevered beta of 1.13. The cost of debt - 5% - represents the expected return demanded by debt holders and is influenced by the company's specific risk profile and the broader market conditions. It is computed considering the current USD risk-free rate of 4.2%, the company's default spread of 0.69%, and the USA default spread of 0%. With a current Equity to EV of 99.6% and a Debt to EV of 0.4%, the discount rate for the next 10 years is 9.5%. In perpetuity, the discount rate remains 9.5%. In recent times, the technology sector has undergone massive sell-offs after most of the Magnificent 7, and several other tech companies missed Q2 expectations, with the Nasdaq losing 11.5% since its all-time high reach on 10th of July 2024. These severe price corrections likely indicate that the market as a whole was expecting more than what was actually deliverable from these tech giants, especially from AI-related technologies. Palantir wasn't spared from this bloodshed, losing nearly 20% from its 2024 highs just before the Q2 report release. However, after the more than welcome positive performance registered in the first half of the year, Palantir's stocks rebounded significantly. Despite our positive outlook for the company, investors should be careful in these delicate market conditions, even though Palantir reported strong Q2 results. However, regardless of possible further tech sell-offs, at current prices, and given the solid operating performances YTD, our assumptions suggest that Palantir's risk-reward profile has the potential to represent a good investment opportunity, particularly for long-term investors willing to benefit from the current tech sector price correction.

Palantir Shares Soared Today. Is It Time to Buy the Red-Hot Artificial Intelligence (AI) Stock? | The Motley Fool

Shares of Palantir Technologies (PLTR 10.38%) surged in Tuesday's trading following a strong quarterly report. The software specialist ended the day up 10.4%, according to data from S&P Global Market Intelligence. Palantir published its second-quarter results after the market closed yesterday, and they came in better than anticipated. The company recorded adjusted earnings per share (EPS) of $0.09 on revenue of $678 million, topping the average Wall Street earnings target by $0.01 per share and the average sales target by roughly $25.7 million. Overall revenue was up 27% year over year in the period, and adjusted EPS was up 80%. The company also raised its full-year targets for sales and operating income. Investors responded to the strong beat-and-raise quarter today by buying up the stock. With today's pop, Palantir is now up roughly 55% year to date. On the other hand, the share price is down roughly 32% from the high that it reached shortly after going public in 2021. It's a volatile stock and undeniably trades at a highly growth-dependent valuation. Palantir is valued at roughly 76 times this year's expected adjusted earnings. The company is also trading at more than 21 times expected sales. This valuation profile means the stock is relatively high risk, but there are signs that the data software specialist can live up to and exceed its current valuation. It continues to record encouraging margins, and its sales growth has actually been accelerating lately. There's a good chance this trend can continue. Sales to private-sector customers increased 33% year over year in the second quarter and accounted for roughly 45% of overall sales. Within the segment, sales to U.S. commercial customers increased 55% year over year and accounted for 52% of sales. Aided by the company's Artificial Intelligence Platform (AIP) suite, the private-sector growth engine is looking very strong. Even with growth also picking up among government customers, the commercial segment will likely soon account for more than half of overall revenue. Given the very strong momentum the segment is seeing, there's a clear path for growth to continue accelerating. For risk-tolerant investors looking to back strong AI players, Palantir's recent business update provided a long list of bullish indicators.