January 10, 2024 | Posted in News
Yiazou Capital Research members get exclusive access to our real-world portfolio. See all our investments here ”
In an economic climate marked by reduced government spending and cautious commercial IT investment, Palantir Technologies Inc. (NYSE:PLTR) has shown resilience and strategic agility. With the introduction of its Artificial Intelligence Platform (AIP) in 2023, Palantir is transitioning from a service to a platform-centric business, gaining traction mainly in the commercial sector.
Recognized for its leadership in AI and data science by Dresner Advisory Services, the company is well-positioned for growth in a rapidly expanding AI market, projected to reach $739 billion by 2030. Palantir’s innovative approach and expanding commercial focus signal a promising future in tech-driven business solutions.
Palantir’s stock pullback, a 12.53% correction since our last update, is approaching our identified entry range of $12.55-$14.95. This drop offers a compelling opportunity for long-term investors to capitalize on Palantir’s solid fundamentals and growth potential in the expanding AI market.
Revenue growth for Palantir has been hovering below 20.0% YoY in the past four quarters due to macro headwinds. Both the government and commercial segments experienced a deceleration, impacted by a decrease in US federal budget allocations and a broader trend of global businesses scaling back on non-essential IT expenditures in response to inflationary pressures.
The government segment contributes 56.0% to Palantir’s total revenue based on TTM revenue. Similarly, the USA contributes 76.2% to total government segment revenue, compared to 43.0% to the commercial segment, indicating the government segment’s geographic concentration.
Over the past eight quarters, the total expenditure of the federal government experienced a negative year-over-year growth of 3.1%, in stark contrast to the robust 26.9% year-over-year growth observed in the preceding eight quarters. This indicates a discernible headwind stemming from the deceleration in government spending.
However, government expenditure is regaining pace again, as Q3’23 federal government total expenditure scored 12.8% YoY growth compared to 8.2% YoY negative growth during Q3’22. Lastly, the global deceleration in inflation is poised to stimulate spending on information technology within commercial sectors.
Consequently, the longstanding macroeconomic headwinds are gradually subsiding, a trend exemplified by the recent quarterly performance of PLTR, signaling a resurgence in growth.
In Q3’23, Palantir reported a year-over-year revenue growth of 16.8%, up from 12.8% in Q2’23, primarily propelled by a robust 22.8% expansion in the commercial segment. Although the contribution from the commercial segment currently lags behind the government segment, accounting for 44.9% of the latest quarter’s revenue, thus its potential for driving future growth is evident.
Palantir’s strategic collaboration with Google Cloud for public cloud services and channel partnerships with IBM and Fujitsu aims to streamline deployment processes, fostering broader market expansion.
Additionally, the introduction of AIP by PLTR will significantly enhance the commercial segments, enabling customers to interact with product ontology more intuitively and expediting software deployment for specific use cases. Notably, major contract wins, such as those with the UK’s National Health Service and the US Army, are expected to accelerate growth in the government segment.
PLTR’s recovery in remaining performance obligation (RPO) also suggests improving revenue growth in the coming quarters. Likewise, the company’s net dollar retention (revenue for the TTM attributable to the customers as counted for the prior TTM divided by revenue for the prior TTM recognized from those same customers) remains above 100.0%, which indicates that the PLTR platform’s stickiness has remained intact.
Palantir remains an outlier among its peers, as the company’s average revenue per customer (ARPC) remains off the chart compared to its peers. The top 20 high-value customers drive most of the revenue for PLTR. However, reliance on the top 20 customers is slowly declining, signifying the company’s effort to serve an expansive and diverse market.
Specifically, the top 20 customers’ contribution to total revenue dropped to 50.8% based on TTM as of September 2023, compared to 57.1% in FY21. As a result, the average revenue per customer of PLTR dropped below USD $5 million based on the latest TTM revenue, compared to USD $6.5 million in FY21.
Meanwhile, the commercial customer count continues to outpace the government segment. Commercial customer count grew by 45.0% YoY as of September 2023 (TTM basis), while total customer count grew by 34.0% YoY during the same period. The growing commercial customer base is helping PLTR reduce its reliance on the top 20 customers and make the business more diverse. Finally, the company ended Q3’23 with a total remaining deal value of USD $3.7 billion, up from USD $3.4 billion in the prior quarter, and the US commercial’s remaining deal value grew by 23.0% YoY.
Palantir’s strategic focus on public cloud offerings will boost expansion in the commercial segment. This emphasis is poised to facilitate the scalability of its Foundry and Apollo products, broadening their client base beyond specialized software applications for defense and counterterrorism purposes.
The company’s pivotal role in geospatial data and pattern recognition positions it as a frontrunner in these domains, setting itself apart from competitors. Finally, against the backdrop of ongoing geopolitical tensions and persistent concerns over supply chain uncertainties, such as the recent disruption in the Red Sea, the company is well-positioned to benefit from a favorable tailwind as it endeavors to drive market expansion.
In April 2023, Palantir introduced its AIP, successfully onboarding 300 distinct organizations onto its platform by September of the same year. AIP facilitates a seamless and natural interaction with the product ontology, significantly enhancing deployment efficiency. In a recent post, the company illustrated how organizations can leverage PLTR’s AIP to identify optimal use cases and efficiently deploy the necessary functions.
In a detailed walkthrough featuring a hypothetical company and its order-to-cash process, Palantir showcased the practical application of AIP. The step-by-step demonstration encompassed connecting to ERP systems, data preparation for process mining, constructing an ontology, leveraging machinery for process interpretation, developing a workshop application for user interaction, and integrating AI-driven decision-making through AIP Logic. The ultimate solution incorporates an AI copilot that provides recommendations on actions related to credit blocks, ultimately enhancing both efficiency and decision-making processes.
This process makes PLTR more customizable and effective for organizations to fix their pain points. The company is conducting AIP boot camps to bring the platform to the targeted customers and make them experience the potential of the products. Hence, this evolution positions Palantir more as a platform than a service company, marking a significant milestone.
As Palantir takes significant strides in integrating AI to elevate its product and service offerings, competitors in the big data, analytics, and business intelligence markets are also actively incorporating AI-driven features. Finally, despite this competition, PLTR’s outlook remains robust, supported by its top-ranking position in the 2023 AI, Data Science, and Machine Learning Market Study published by Dresner Advisory Services.
Palantir has ample room for expanding its commercial segment, and the introduction of AIP is poised to expedite this growth trajectory. With the incorporation of AIP, the company gains increased potential to secure high-margin commercial clients.
Additionally, Christopher Cemper, an AI and cybersecurity expert and CEO of AIPRM, commends Palantir’s AI platform for its versatility and leadership in the AI/machine learning space. He notes its widespread adoption across various industries and its ability to let users customize and compare algorithms. However, he suggests a need for detailed technical analysis and a closer look at privacy concerns.
Further, PLTR’s emphasis on a module-based sales strategy, aimed at broadening its consumer client base, receives a further boost from AIP. This strategic approach enables the company to offer commercial clients specific modules tailored to their needs rather than compelling them to purchase an entire enterprise package, thus addressing potential client concerns about unnecessary features.
Numerous major enterprises are cautiously navigating the adoption of AI-driven solutions, meticulously assessing how best to integrate this cutting-edge technology to address their needs. As organizations continue to fine-tune their strategies for implementing AI in decision-making and automation, a surge in adoption rates is anticipated, positioning the company’s AIP at the forefront of this industry-wide transformation. Finally, projections indicate that the AI market is poised to reach USD $739 billion by 2030, showcasing a remarkable 17.0% CAGR from 2023 to 2030.
PLTR’s current price-to-sales ratio, calculated on the trailing twelve months (TTM) revenue as of Q3’23 and the market conditions as of January 5, 2024, stands at 16.4x. This figure suggests that the market values PLTR at a lower multiple relative to most of its peers, signaling an undervaluation.
This undervaluation may reflect the market underappreciating not only PLTR’s improved margin but also, crucially, the significant potential of AIP. The latter can expand the company’s market beyond government contracts and into diverse use cases within the commercial segment.
Rule of 40 analysis holds significance for software or SaaS companies, signifying that those attaining a combined score of 40.0% in revenue growth and margin (with EBITDA margin in this instance) are more likely to achieve sustainable growth. Based on TTM, PLTR has a YoY revenue growth of 16.1% and an EBITDA margin of 3.3%, leading to a combined score of 19.4%.
Even though there is a lot of progress to be made, Palantir could exceed the 40.0% threshold (sum of growth and margin) by revitalizing its revenue growth beyond the 30.0% mark and continuing the upward trend in its EBITDA margin, which seems highly likely given the company’s progress in the expansion of the commercial segment and AIP’s potential to cater to high margin clients.
Lastly, PLTR management raised their guidance revenue to USD $2.2 billion for FY24, which seems achievable, and there is a high possibility that they will beat their guidance given the traction in the commercial segment. Also, GAAP operating profit is to continue with the continuation of subdued opex intensity in Q4’23. Therefore, considering an expected USD $2.2 billion annual revenue, PLTR P/S stands below 16.0x, and given the company’s reacceleration of revenue growth towards above 20.0%, the company is trading at a bargain.
Despite recent revenue growth challenges, Palantir’s innovative AI focus and expansion into the commercial sector, recognized by Dresner Advisory Services, position it for growth in an AI market projected to reach $739 billion by 2030. The recent stock correction to $15 levels offers an attractive entry point for long-term investors, considering Palantir’s solid fundamentals and potential in the expanding AI landscape.