Summary
Palantir has seen a strong 2023 with shares increasing by 182.47% YTD and 143.59% since May 5. The company is set to report its Q2 2023 earnings on August 7.
The company has expanded its partnerships in 2023 and is expected to deliver strong growth numbers. It has announced deals with government entities in Ukraine and expanded its commercial partnerships with Microsoft and others.
I believe that PLTR could be worth over $100 billion in the future, based on assumptions of continued revenue.
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Drew Angerer
Palantir (NYSE:PLTR $Palantir Technologies Inc.(PLTR)$ ) is one of the most popular stocks, and for many, it's been a wild ride. Since the direct listing, investors have seen shares skyrocket to the high $30s, crash to $5.84, and ride the AI boom back to the high teens. I invested in PLTR at the direct listing and purchased shares on the way up and as they declined in price. I was vocal about my dissatisfaction with how Alex Karp handled what has now become the infamous Q2 2022 conference call and became bullish again as PLTR turned things around. 2023 has been a strong year for PLTR as shares have increased by 182.47% YTD. Some investors have done well, while others got back to even or chipped away at the losses. Since May 5, shares have appreciated by 143.59%, appreciating from $7.41 to $18.05. Q2 2023 earnings are around the corner as PLTR is set to report post-market on August 7. Shares can continue higher into earnings and continue throughout 2023 if PLTR delivers growth across its revenue, earnings, customers, and contracts while maintaining its Q2 free cash flow (FCF) margins. In this article, I will discuss what I am looking for in the Q2 2023 earnings report and provide some insights as to what I think shares of PLTR could be worth in the future.
PLTR
Seeking Alpha
Palantir continues expanding its partnerships in 2023
In 2021, PLTR made 45 official announcements through its website newsroom, and in 2022, PLTR had 44 announcements. PLTR has been busy in 2023; through July 18, they have made 26 official announcements. This doesn't include any of the blog posts PLTR has written discussing the work their conducting. I continuously research these aspects as they provide insight into what will be discussed on the earnings call and in the 10-Q. In Q2 2023, PLTR posted 14 press releases and another four in July. For PLTR to continue its growth trajectory, it needs more adaptation of its products in the government space as well as the private sector.
I expect PLTR to deliver strong growth numbers as there have been significant partnerships announced since April 1. On the government side, Palantir announced two deals with government entities in Ukraine, including the Prosecutor General's Office of Ukraine and the Ministry of Digital Transformation of Ukraine. PLTR announced that Ukraine would utilize its technology to support the defense and reconstruction of the country and empower Ukraine investigators with critical data processing tools regarding 78,000 registered war crimes. US Special Operations Command entered a multi-year contract worth up to $463 million to expand its enterprise capabilities.
On the commercial side, PLTR expanded its cloud partnership with Microsoft (MSFT), entered into an agreement to build an integrated management flow system on top of Foundry for CA Modas S.A, and expanded its partnership with Jacobs Solutions (J). These partnerships are critical because it will allow PLTR to expand throughout several sectors through some of the largest counterparts. I expect the Jacobs and Microsoft partnerships to be extremely beneficial in the coming years as more companies look to create value by enabling AI and moving toward data-driven decisions.
What I am looking for from earnings in Q2 2023 from Palantir?
In the Q1 2023 press release, PLTR guided for revenue of $528-$532 million, adjusted income from operations of $118-$122 million, and to be GAAP profitable. The full-year guidance consisted of revenue between $2.185-$2.235 billion, adjusted income from operations of $506-$556 million, and to show GAAP profitability each quarter. For PLTR to continue on the current trajectory and get back into the $20s, I feel we need to see growth across every aspect of the business that PLTR is capable of delivering.
Customer Count
PLTR finished Q1 2023 with 280 commercial customers and 111 government customers for a total of 391 customers. Customer counts are critical because of the ability to upsell products. I want to see PLTR get to 115+ government customers and 300+ commercial customers to bring their total customer base to at least 415. More customers equal more contractual agreements, and more agreements should lead to additional prospects for new business. One aspect that people seem to forget is that word of mouth is critical in business. When customers see success, they are more likely to speak highly about a product that has transformed their business to friends, and counterparts at conferences. When people their peers respect discuss how transformational a product is, there is a level of buzz generated, and additional entities look into how they can utilize the product and if they will see the same benefits. The more companies that use PLTR the better, and when you look at PLTR's AIP conference and see companies like Cisco Systems (CSCO) and Jacobs presenting, it's a powerful statement.
Don't forget PLTR was looked at as a black box for years, and the big question was diversification into the commercial space. PLTR's commercial client list has increased by 367% over the past two years as they added 220 clients. This wouldn't occur unless PLTR was building products that provide value for their clients or industry insiders discussing the benefits of partnering with PLTR with their peers. The sales team at PLTR closed 55 deals over $1 million, 11 deals over $5 million, and five deals over $10 million in their slowest quarter in the past three quarters. Due to more buzz around AIP, I would like to see 60+ deals of $1 million+ and 15 deals of $5 million plus.
Customers
Steven Fiorillo, Palantir
Revenue
PLTR guided for revenue to come in at $528-$532 million in Q2 and revenue of $2.185-$2.235 billion for the full year. In Q1, PLTR delivered $525.2 million in revenue which is 24.04% of the low-end estimates and 23.5% of the high-end estimates for 2023. For PLTR to meet its 2023 full-year revenue guidance, it would need to generate an average of $553.27 million in Q2–Q4 to meet the low-end projection and an average of $569.94 to meet the high-end estimates.
I expect PLTR to deliver at least $550 million in revenue for Q2 and discuss how they will increase incremental revenue throughout the year as more contracts continue to be initiated on an ongoing basis. If we see anywhere from $550-$575 million in revenue for Q2, it would be a strong indication that the high-end estimates will be met or exceeded when they report their 2023 fiscal year numbers. If PLTR records $550 million in Q2, $575 million in Q3, and $601 million in Q4, PLTR will generate $2.25 billion in annual revenue for 2023. This would be an average QoQ revenue increase of 4.6% over the next three quarters. I think it will be a strong signal coming off the AIP conference if PLTR is on track to beat the high-end estimates, as that would mean PLTR will be moving into the $600 million quarterly revenue bracket sometime in 2023 and inching their way closer to generating over $1 billion in revenue on a quarterly basis.
PLTR Revenue
Steven Fiorillo, Seeking Alpha
Operating income and profits
PLTR has now strung together two consecutive quarters of GAAP profitability and is projecting its adjusted income from operations coming in at $118-$122 million in 2023 and between $506-$556 million for their fiscal year. In Q1 2023, PLTR generated $125.11 million in adjusted income from operations, which is 24.73% of the low-end projection and 22.50% of the high-end estimate. This would mean that PLTR would need to increase its adjusted income throughout the year to meet its annualized projections.
I dislike adjusted numbers and prefer free cash flow (FCF) as it's harder to distort than other profitability measures. In Q1, PLTR generated $188.9 million in adjusted FCF, which is a 36% margin. PLTR's true FCF number was $182.6 million, as they generated $187.4 million in cash from operations and allocated $4.8 million toward CapEx. This places PLTR's FCF margin at 34.77%, which is the largest margin they have operated at since becoming a publicly traded company.
Financials
Palantir
FCF
Steven Fiorillo, Seeking Alpha
For the past two quarters, PLTR's total expenses declined QoQ while their revenue has increased. Before GAAP accounting practice, the spread between revenue and all expenses calculated as operating income went from -$62.2 million to $4.1 million. Based on these trends, and PLTR's guidance, it makes me believe that PLTR will continue to keep expenses at bay to push their GAAP profitability goals, and if this is true, they should continue to operate at high FCF margins. PLTR generated a 34.06% FCF margin in Q1 of 2021, so operating at a 30% plus FCF margin is not a new accomplishment for them. If PLTR can maintain a 33% FCF margin, it would generate $737.55 million in FCF if their high-end revenue estimates of $2.24 billion are achieved. We could see $1 billion of FCF generated in 2024 at this rate. Q2 2023 is very important for many things, but the metric I am really focused on is their FCF margin being 33% or above.
PLTR
Steven Fiorillo, Seeking Alpha
Why I believe Palantir will have a market cap north of $100 billion in the future
I have previously indicated that I believe PLTR can replicate similar growth to Salesforce (CRM). CRM currently has a market cap of $223.51 billion and, in the TTM, has generated $32.19 billion of revenue and $7.06 billion in FCF. Mr. Market is valuing CRM at a 6.94x multiple on sales, and 31.64x FCF. CRM has seen explosive growth over the last decade as its grown its revenue by 690.67% and its FCF by 1,125.54%. Including the TTM, CRM has operated at a 20.57% FCF margin over the previous five years.
Salesforce
Steven Fiorillo, Seeking Alpha
Salesforce
Steven Fiorillo, Seeking Alpha
If PLTR finishes on the high-end of their revenue estimates for 2023 they would deliver $2.25 billion in revenue. PLTR's previous projections placed their 2025 revenue at $4 billion or more and I don't recall seeing updated estimates. If PLTR comes in on the high end of the 2023 projections and generates $2.25 billion, its YoY revenue growth would have decelerated from 41.11% in 2021 to 23.61% in 2022 and 18.12% in 2023. Hypothetically, if PLTR can grow its revenue at a 15% YoY basis over the next decade from 2024–2033, it would generate $2.98 billion in revenue for 2025 and $9.12 billion in 2033. At a 33% FCF margin in 2033, PLTR would generate $3 billion in FCF. At a 32x multiple on FCF, PLTR would be valued at $96.17 billion.
If PLTR can maintain an 18% YoY revenue growth rate and maintain a 33% FCF margin, PLTR will generate $11.78 billion in revenue and $3.89 billion in FCF in 2033. At a 32x FCF multiple, PLTR would be valued at $124.42 billion. If PLTR was to grow at a quicker pace of 21% YoY on average, they would generate $15.15 billion in revenue and $5 billion in FCF in 2033. Assigning a 32x multiple on their FCF would place PLTR at a $159.93 billion valuation.
Based on these assumptions, PLTR could grow between 151.49%-318.23% over the next decade, which would be an annualized return of 15.15%-31.82%. These are just assumptions regarding what could occur and why I feel PLTR could be a good long-term investment.
For those who think a 32x multiple on FCF is a crazy valuation, I am going to place a table below. Based on the current market caps, big tech has multiples from 31.29x to 221.31x. Putting the outliers aside, it's not uncommon to see companies trade in the 40x range. Even companies such as the Coca-Cola Company (KO) trade at a 29.90x multiple and PepsiCo (PEP) trade at a 45.41x multiple on FCF.
FCF
Steven Fiorillo, Seeking Alpha
The risks of investing in PLTR
PLTR is not a cheap company, and some would consider the valuation high. PLTR has seen its share price skyrocket in 2023, and the worst things that could occur are misses on the projections and not being GAAP profitable. Some are still skeptical about PLTR's technology and its relevance in the AI space despite what industry heavyweights such as Jacobs or CSCO have indicated. If PLTR's momentum is broken and they are not GAAP profitable, their prospects of entering the S&P 500 in 2024 are put at risk. I am hoping that PLTR was underpromising with their estimates because if there is a miss, I won't be surprised if shares sell off considerably. While PLTR has a clean balance sheet and PLTR has become profitable, if PLTR's momentum is broken, shareholders could be in for a rough patch in the back half of 2023.
Conclusion
PLTR is reporting in roughly two weeks, and I think this earnings report could help propel the stock back into the $20s. PLTR has a lot going for it, and Q2 2023 is going to set the tone for the rest of the year. Suppose PLTR can overdeliver and keep its FCF margins above 30%. In that case, I think there will be less emphasis on the valuation and more discussion around the importance of its platforms and the cash-generating opportunity they present. If PLTR is GAAP profitable again, it sets the stage for inclusion in the S&P 500 as early as Q4 of 2023, depending on the next quarter's results which would cause large amounts of institutional buying as PLTR would be added to the S&P 500 index funds. I still believe that PLTR will be the second most important software company behind Microsoft (MSFT) by the time this decade is finished, and I don't think it's unreasonable to project PLTR will be a $100+ billion company at some point over the next decade. I still believe PLTR can generate enticing returns, and I am excited about their upcoming earnings.
Source: seeking alpha
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