Palantir Technologies: Staying Clear Of This Overvalued AI Play

Seeking Alpha2023-08-10

SummaryPalantir Technologies' shares have dropped recently despite the company exceeding its own guidance for the most recent quarter.The company's government services saw a 15% increase in sales, ...

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Comments

SG2008
2023-08-10
SG2008
You werent calling a sell when it's at ATH🤣
Merdeka1981
2023-08-10
Merdeka1981
They just had the worst diarrhoea last night, ever.

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As I highlighted in a prior article, shares of Palantir Technologies (NYSE:PLTR) look meaningfully overpriced at this point in time. I even made the case that achieving attractive growth would result in the company requiring potentially years before making for an attractive opportunity. Despite management exceeding expectations for the quarter, shares have recently taken a step back, with the market likely coming to accept the idea that this AI play is overpriced.Great results change nothingI want to be very clear on something before I move forward. From a business and operational perspective, I believe that the future for Palantir Technologies is likely bright. Management is growing the company and they have successfully moved it in the direction of profitability. I suspect that this trend will continue for the foreseeable future. But there is a difference between being optimistic about future operating results and optimistic about where shares are going or should go. I am not optimistic when it comes to the overall pricing of the company.Author - SEC EDGAR DataThose who disagree with me very well could point to the most recent results covering the second quarter of the company's 2023 fiscal year. These were just announced after the market closed on August 7. According to management, revenue came in at $533.3 million. That represents an increase of 12.7% over the $473 million the business reported one year earlier. This came very close to matching the $533.8 million in sales that analysts anticipated and, more importantly, it exceeded the $528 million to $532 million range that management had forecasted when it reported results for the first quarter.Palantir TechnologiesPalantir TechnologiesThe greatest growth for the company came from its government services. Sales jumped 15% year over year, climbing from $263 million to $302 million. By comparison, commercial revenue growth was a more modest 10%, taking sales from $210 million to $232 million. When it comes to only the US market, however, the script was flipped. Government revenue here at home grew only about 10% compared to the 20% growth on the commercial side. There were a few drivers behind this sales increase.Palantir TechnologiesOver the trailing 12-month window, the top 20 customers averaged $53 million in sales for the business. That was 15% higher than the $46 million reported one year earlier. What this shows is that the largest customers for the company are using its services even more than they were one year earlier. Second, the number of customers the company services also grew. At the end of the most recent quarter, management boasted 421 customers. That was up about 7.7% from the 391 reported in the first quarter of this year and it was 38.5% greater than the 304 that the company had in the second quarter of 2022. This, combined with greater spending per customer, helped billings grow from $396 million to $603 million in the course of one year. That's an increase of 52.3%.Palantir TechnologiesMoving forward, management is expecting even more growth. This is likely the result of the fact that the company closed 66 deals during the second quarter that were worth at least $1 million apiece. Thirty of these were worth $5 million or more, with 18 of them being worth at least $10 million. This is likely one of the big reasons why management is forecasting continued attractive revenue growth into the third quarter. The current expectation by management is for sales of between $553 million and $557 million. At the midpoint, that would represent a 16.1% increase compared to the $477.9 million in sales reported in the third quarter of 2022.Palantir TechnologiesOn the bottom line, management also posted positive results. Earnings per share went from negative $0.09 to positive $0.01. Even though this may not seem like much of a change, it translated from a loss of $179.3 million to a gain of $28.1 million. Adjusted earnings, meanwhile, came in at $0.05 per share, up from negative 0.01 per share the same time last year. Both of these results matched what analysts anticipated. There were other profitability metrics that were significant. For instance, operating cash flow went from $62.4 million to $90.2 million. If we adjust for changes in working capital, the metric climbed from $117.5 million to $138.3 million. Another important metric is adjusted operating income. This expanded from $107.8 million to $135 million. It is worth noting that management was forecasting a reading here of between $118 million and $122 million. And finally, EBITDA managed to rise from $112.7 million to $143.4 million.For the third quarter of the year, management is forecasting adjusted operating income of between $135 million and $139 million. But the really interesting guidance is when it comes to 2023 as a whole. Currently, management is forecasting sales to exceed $2.212 billion. If you recall from the first quarter of the year, guidance was for a range of between $2.185 billion and $2.235 billion. News reported on the topic paints this as an increase in guidance. It is, I suppose, but only marginally so. Basically, midpoint guidance previously was $2.21 billion. All management is saying is that revenue will come in at some point, probably marginally so, above this. The more significant guidance improvement was on the bottom line. In the past, management said that adjusted operating income would be between $506 million and $556 million. Now, they forecast this number to come in above $576 million. This, unlike the revenue picture, is a meaningful improvement.Author - SEC EDGAR DataWhile it's great to see guidance increase and for the company to exceed expectations, this does not change my view that shares are very expensive. I won't repeat my entire analysis from my most recent article, the one that is linked above, because my overall view on the matter is still the same as it was when I wrote that. I also believe that the numbers reported for 2024 and beyond are still realistic. But as you can see in the chart above, if we equate the adjusted operating income to both adjusted operating cash flow and EBITDA for the year, we would see that the company is trading at a forward price to adjusted operating cash flow multiple of 66.9 and at a forward EV to EBITDA multiple of 61.7. The latter of these is aided by the fact that the company has $3.1 billion in cash on hand and no debt. This does at least provide the company a good degree of safety. The evaluation for 2023 is better than it is for 2022. But both are incredibly expensive.One other thing I would like to touch on is that management did announce, in the earnings release, that they were initiating a $1 billion share buyback program. In some respects, this is not surprising given how much cash the business has and the fact that it has now been profitable for three quarters in a row. But I view this announcement as incredibly troubling if management follows through on it. The firm should be using all the capital it can to grow as rapidly as it can instead of buying back stock that's trading at prices that are frankly unrealistic. This is yet one more reason why I am maintaining my overall bearish sentiment on the stock.TakeawayOperationally speaking, Palantir Technologies is doing a solid job right now. Management has made improvements on the bottom line while continuing to grow the top line. I think this is probably going to continue in the long run. But I cannot get past just how expensive shares are. In the aforementioned prior article that I wrote on the company, I detailed how expensive the stock is even with attractive growth. For now, I feel confident enough in my overall assessment to rate the business a ‘sell’, even in light of recent fundamental outperformance.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":207416988958896,"gmtCreate":1691667729643,"gmtModify":1691667736052,"author":{"id":"3576225190656221","authorId":"3576225190656221","name":"SG2008","avatar":"https://community-static.tradeup.com/news/f3c373b2dbd5a1c9d3ac975dd4f40594","vip":1,"hat":"https://static.tigerbbs.com/f84d87792f02cf78e80ee34979fd31e5","crmLevel":8,"crmLevelSwitch":1,"idStr":"3576225190656221","authorIdStr":"3576225190656221"},"htmlText":"You werent calling a&nbsp;sell when it's at ATH🤣","listText":"You werent calling a&nbsp;sell when it's at ATH🤣","text":"You werent calling a sell when it's at ATH🤣","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/207416988958896","repostId":2358796741,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":207308075573392,"gmtCreate":1691641472617,"gmtModify":1691641478664,"author":{"id":"4102568791638160","authorId":"4102568791638160","name":"Merdeka1981","avatar":"https://community-static.tradeup.com/news/370fc16a4d1090b47fe92034808ebbdd","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":5,"crmLevelSwitch":0,"idStr":"4102568791638160","authorIdStr":"4102568791638160"},"htmlText":"They just had the worst diarrhoea last night, ever.","listText":"They just had the worst diarrhoea last night, ever.","text":"They just had the worst diarrhoea last night, ever.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/207308075573392","repostId":2358796741,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":26,"commentSize":2,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2358796741"}