Palantir Earnings: AI Momentum Lifts Sales and Guidance

•

Fair
Value
Estimate:
$19
• Morningstar
Rating:
2
stars
• Economic
Moat:
Narrow
• Morningstar
Uncertainty
Rating:
High

What
We
Thought
of
Palantir’s
Earnings

In
retrospect,
some
of
our
prior
estimates,
while
being
above
consensus,
did
not
fully
capture
the
AI
momentum
uplifting
Palantir’s
commercial
sales.
We
continue
to
be
optimistic
about
the
firm’s
AI
opportunity
as
a
deeply
embedded
player
in
the
space
with
years
of
experience
working
with
large
commercial
and
government
clients.
We
also
think
the
firm’s
rising
profitability
is
a
testament
to
the
attractive
unit
economics
built
into
its
software
business,
with
revenue
growth
far
outpacing
the
increase
in
operating
expenses.

From
a
valuation
standpoint,
while
our
forward-looking
estimates
testify
to
our
optimism
on
the
name,
we
remain
sceptical
of
the
exuberant
valuation
at
which
Palantir
is
trading.
Even
without
factoring
in
the
sharp
rise
in
the
firm’s
stock
price
after
hours,
Palantir
remains
the
most
expensive
software
company
in
our
coverage,
with
an
enterprise
value/sales
multiple
of
around
20
times.
We’d
caution
investors
that,
with
the
sky-high
expectations
baked
into
the
firm’s
current
valuation,
any
small
bump
on
the
road
can
crater
the
stock
price.

Palantir’s
second-quarter
sales
clocked
in
at
$678
million,
up
27%
year
over
year
and
more
than
$27
million
ahead
of
our
$651
million
prior
estimate.
The
firm’s
success
in
the
US
commercial
market
continues
to
impress
us,
with
sales
from
this
segment
expanding
55%
year
over
year
to
$159
million
and
with
US
commercial
customer
count
expanding
to
295,
up
from
161
a
year
ago.
Alongside
commercial
customer
strength,
Palantir’s
government
sales
growth
was
no
slouch
either,
expanding
23%
year
over
year
to
$371
million.
Over
the
long
term,
we
expect
Palantir
to
materially
benefit
from
governments
and
businesses
alike
expanding
their
use
of
AI
across
their
organizations.

Palantir’s
AI
Boot
Camps
Impress

On
a
forward-looking
basis,
Palantir’s
business
appears
strong.
The
firm’s
billings
and
RPO,
or
remaining
performance
obligations,
expanded
19%
and
42%
year
over
year,
respectively.
We
see
strength
in
these
forward-looking
metrics
as
evidence
of
the
strong
underlying
demand
for
Palantir’s
solutions.
With
new
customers
signing
up
with
Palantir
at
a
breakneck
rate,
we
see
them
sticking
around
for
a
long
time
due
to
the
strong
customer
switching
costs
built
into
Palantir’s
platforms.

As
interest
in
AI
has
picked
up
over
the
past
few
quarters,
companies
have
been
scrambling
to
find
new
use
cases
for
leveraging
AI
within
their
organizations.
Palantir,
rather
shrewdly,
saw
this
as
an
opportunity
to
showcase
its
existing
AI
capabilities
to
both
commercial
and
government
clients.
The
firm’s
boot
camps,
which
are
essentially
multiday
events
that
help
prospective
customers
see
what
they
can
practically
achieve
with
its
Artificial
Intelligence
Platform,
or
AIP,
have
been
a
great
tool
in
its
arsenal.
Instead
of
investing
heavily
in
sales,
which
other
than
costly
is
also
time-inefficient
as
sales
reps
typically
need
time
to
ramp,
the
firm’s
bootcamps
serve
as
the
tip
of
its
go-to-market
spear.

While
we
were
initially
sceptical
of
how
successful
a
boot-camp-led
sales
motion
could
be,
we’d
be
remiss
not
to
note
that
the
firm
landed
96
deals
with
a
total
contract
value,
or
TCV,
of
more
than
$1
million
in
the
second
quarter.
While
it
is
unlikely
that
all
of
these
deals
stemmed
from
the
firm’s
boot
camp
channel,
we
were
impressed
by
the
illustrative
examples
provided
by
Palantir
of
customers
that
signed
large
deals
with
the
firm
within
weeks
of
attending
a
boot
camp.

The
firm’s
boot-camp-led
sales
model
also
helped
it
keep
a
lid
on
operating
expenses,
thereby
materially
improving
its
profitability
as
compared
with
a
year
ago.
Palantir’s
adjusted
operating
margins
came
in
at
37%
for
the
second
quarter,
up
from
25%
a
year
ago.
As
we
layer
the
firm’s
success
with
its
boot-camp-led
sales
model
on
top
of
the
attractive
unit
economics
it
can
generate
from
existing
customers,
we
see
further
margin
expansion
for
Palantir
in
the
long
run
as
the
firm
scales
up.

Palantir’s
success
in
AIP
is
not
restricted
to
new
customers.
The
firm’s
net
retention,
a
measure
of
a
company’s
ability
to
upsell
existing
customers,
is
also
trending
in
the
right
direction.
Net
retention
for
the
second
quarter
was
114%,
up
from
110%
a
year
ago
and
111%
last
quarter.

The
Bull
Case
for
Palantir
Stock

For
investors
interested
in
what
assumptions
one
must
make
to
arrive
within
striking
distance
of
Palantir’s
current
valuation,
we
also
looked
at
a
hypothetical
bull
case
in
which
commercial
sales
continue
to
accelerate
in
the
near
term
as
the
firm’s
AIP
attracts
massive
amounts
of
business
from
existing
and
new
customers.
In
this
scenario,
we
model
a
26%
five-year
CAGR,
versus
our
base-case
five-year
top-line
CAGR
of
22%.
Along
with
higher-for-longer
top-line
growth,
we
also
model
in
even
more
robust
long-term
margin
expansion
for
Palantir
in
this
scenario.
All
in
all,
our
bull
case
results
in
a
$26
fair
value
estimate,
just
slightly
below
the
firm’s
after-hours
stock
price.

The
cherry
on
top
of
a
great
earnings
result
was
Palantir
raising
its
outlook
for
the
remainder
of
fiscal
2024.
The
firm’s
updated
guidance
calls
for
2024
sales
and
adjusted
operating
income
of
$2.75
billion
and
$970
million,
both
at
the
midpoint
of
guidance,
up
from
$2.68
billion
and
$874
million
previously.
With
strong
demand
tailwinds
behind
the
business’
back,
especially
on
the
US
commercial
side,
we
expect
Palantir
to
surpass
these
revised
estimates
and
are
modeling
2024
sales
and
adjusted
operating
income
in
excess
of
the
firm’s
guidance.

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