Summary
Palantir has turned profitable in the fourth quarter of 2022, first time in the company's history.
Revenue has grown rapidly year-over-year, both from governmental and commercial sources.
The growth in customer count and the growth in revenue per customer have both materially contributed to the results.
While we own shares of Palantir, we are not adding to our existing position after the earnings report. Despite the high growth and the further growth potential, we believe that the stock is trading at a significant premium based on the traditional price multiples, which is difficult to justify at the current price levels.
(Source: stock.adobe.com)
Introduction
Palantir Technologies Inc. builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. The firm’s stock has started to trade publicly in October 2022. Initially, the stock price has surged drastically, mostly fueled by the overall market hype during the Covid-19 pandemic. The hype has been primarily driven by the “disruptive technologies” used by the firm, as well as by the strong revenue and customer growth figures. On the other hand, fundamental measures have not been supporting the valuation at that time. Partially for this reason, towards the end of 2021, the stock price has started to decline gradually, even falling below the IPO valuation. The following chart depicts PLTR’s price history since the IPO.
(Source: Ycharts)
Today, we are writing about Palantir, because the firm has recently released its Q4 2022 earnings report. This earnings report marks an important milestone in the firm’s history. For the fourth quarter of 2022, the company has reported its first ever positive GAAP net income, meaning that the firm became profitable. After the earnings release, the share price has skyrocketed.
In this article, we will be taking a look at the firm’s Q4 results and we will be commenting on the various measures why they may be important in the coming quarters.
Q4 results
The following table summarises the firm’s Q4 financial highlights.
(Source: Palantir)
Revenue
The company’s revenue has been growing at a rate of 18% in the fourth quarter, compared to the prior year. In Q4, revenue has $500 million. On a full year basis, 2022 revenue has been about $1.9 billion, representing a 24% increase year-over-year.
Also important to break this figure down both by geography and by source.
By source:
Commercial revenue has increased by 11% YoY in Q4, while government revenue has increased by as much as 23%. As of now, commercial revenue represent about 40% of the total revenue. Looking at the full year figures, government revenue has increased by 19%, while commercial revenue by 29%.
(Source: Palantir)
So why is this important?
In our view, it is important that the firm has a wide client base. A diverse customer base can reduce the risk of overly high exposure to any one of the clients.
We believe that having governments as a revenue source could be a plus, especially during times of downturns. Normally these revenues are not directly impacted by the business cycles or consumer sentiment and therefore tend to be less volatile. Further, in the current geopolitical environment, including the tension in the Eastern European region, as well as the deteriorating relationship between China and the United States, governments are unlikely to cut back on spending related to defence and security. For these reasons, we expect the firm’s revenue from governments to keep growing in the coming quarter.
On the other hand, the firm has appeared relatively conservative with their guidance, in Q1 2023 revenue is expected to be lower than in Q4, in the range of $503 million to $507 million. On a full year basis, however, they have guided between $2.18 billion to $2.23 billion, expecting a double digit increase year-over-year in 2023. They also expect the firm to remain profitable in 2023.
We also very much like the development of the commercial revenue. In the previous years the reliance on mostly government revenues has posed a substantial risk. We believe that this risk is now being significantly reduced, by the rapidly growing customer count.
By geography:
About 75% of the government revenue has been coming from the U.S. in 2022, in contrast to the commercial segment, in which only 40% of the revenue has come from the USA. Again, in our view, the diversification not only by source, but also by geography is an important step in managing risk and limiting the exposure to individual clients and contracts.
Now, we also need to understand the primary drivers of the growth.
1.) Customer count
Customer count has increased as much as 55% year-over-year in the last quarter. It represents a net addition of more than hundred customers.
(Source: Palantir)
In our opinion, customer count is likely to keep increasing in the quarters and years to come. As mentioned earlier, the current trends in data analytics, cyber security and in the developments of the geopolitical landscape are all providing tailwinds for PLTR’s business.
2.) Revenue per customer
Not only the number of customers has grown, but also the amount that they have been spending. The following charts show how PLTR’s commercial customer count has developed along with the average TTM revenue per top 20 customer. We can see that the latter chart indicates a year-over-year growth of 13%.
(Source: Palantir)
While the revenue- and customer growth have been impressive along with the diversification of the revenue, we also have to appreciate some risks. To do so, we will be looking at several additional financial metrics.
Adjusted free cash flow
The adjusted free cash flow in 2022 has declined by more than 50%, compared to 2021. The primary reasons have been the decline in cash flow from operating activities and the increase in purchase of property and equipment. This has also led to a substantial margin contraction from 28% to 11%.
(Source: Palantir)
In general, we would like to see the cash flow from operating activities improving, along with the margins.
Adjusted operating income
Adjusted operating income has also declined in 2022 compared to 2021, however the loss from operations has substantially improved.
(Source: Palantir)
Adjusted operating income margin has contracted by as much as 9%. Going forward, the firm is expecting adjusted income from operations to decline in Q1 2023. On the full year basis, they have guided between $481 million - $531 million for 2023, indicating double digit increase.
Our final take on the stock
In our diversified portfolio we have a relatively small, speculative position in Palantir. We started our position in 2022 and we have a cost basis of $7.3 per share. We bought the shares with the aim of holding them as a long term investment for a horizon of 5 to 10 years.
After the run up in share price, we will not be adding to our existing position.
Although the quarterly and full year results have been quite promising, we would not like to add to our position right now due to the valuation. According to a set of traditional price multiples, PLTR’s stock is trading at a substantial premium compared to the information technology sector median. We would consider adding to our position either if the price fell to the $5/share price range in the near future, or if the firm managed to sustain its profitability in the coming quarters, while improved its cash flow from operating activities. But, even if the share price fell to $5 per share, the stock would still be trading at a premium, but at that level it would be easier to justify it based on the exhibited growth and further growth potential.
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Disclaimer:
I/we have stock, option or similar derivative position in Palantir Technologies Inc. I wrote this article myself, and it expresses my own opinions. Past performance is not an indicator of future performance. This post is illustrative and educational and is not a specific offer of products or services or financial advice. Information in this article is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change.