Summary
Palantir Technologies' (PLTR) stock prices fell -17.79% from February, partly attributed to the company missing consensus estimates' EPS of $0.04.
For FY2020 and FY2021, the company's stock-based compensation totaled $1.27B and $778M, representing close to 116% and 50.4% of its respective revenues.
Nonetheless, we expect its stock-based compensation to moderate over the next three years, once the company turns GAAP profitable.
Due to the ongoing war in Ukraine, we also expect government expenditures on defense and security to increase, which will further boost PLTR's revenue growth and adoption moving forward.
As a result, we expect the company's excellent forward performance to counter the negative impact of its share-based compensation.
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Investment Thesis
From our last article in February, Palantir Technologies' (NYSE:NYSE:PLTR) stock prices have, unfortunately, fallen by -17.79%, from $13.10 to $10.77 ( as of 16 March 2022 ). These were mainly attributed to the company reporting non-GAAP EPS of $0.02 in FQ4'21, missing consensus estimates of $0.04. Despite achieving record-breaking revenues of $432.8M and beating consensus estimates of $418.07M in the same quarter, it is evident that PLTR's stock-based compensation scheme has come back to haunt the company.
PLTR's Stock-Based Compensation Has Finally Came Back To Bite It In The "Rear"PLTR Revenue, Operating Income, And Free Cash Flow
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For FY2021, PLTR reported revenues of $1.54B, representing impressive YoY growth of 41.1%. The company also reported a healthy free cash flow of $321.22 in the whole year, while narrowing its operating losses from -$210.3M in FQ4'20 to -$58.9M in FQ4'21. However, its adjusted EPS declined from $0.06 in FQ4'20 to $0.02 in FQ4'21, excluding the massive share-based compensation. In addition, PLTR's weighted average shares more than doubled from 979M at the end of FY2020 to 1.923B by the end of FY2021. The fact remains that its stock-based compensation racked up total expenses of $1.27B in FY2020 and $778M in FY2021, which represented close to 116% of its revenues in FY2020 and 50.4% in FY2021, respectively. The number is obviously significant, triggering a massive sell-off from its existing shareholders, who were concerned due to the continual share dilution.
Nonetheless, we may observe a potential improvement moving forward through its recentFQ4'21 10K form. PLTR reported $922.4M of stock-based compensation expense related to the RSUs outstanding over the next three years and $888.6M of expense related to options outstanding over eight years. These translate to an average of $418.47M annually for the next three years. Though still on the higher side, it represents a massive discount from FY2020 and FY2021. The CEO has also reassured PLTR investors in itslatest earnings call that normalization of its share-based compensation is expected within the next two years, once the tech company turns GAAP profitable. However, we expect its stock performance to continue sideways for some time, given the existing negative sentiment surrounding its continuous share dilution.
Excellent Performance In FY2021, With More To Come Post Ukraine War
Despite its poorer EPS performance and share dilution, PLTR has shown much promise in its current and future application. InFQ4'21 alone, PLTR signed 34 new customers and closed 64 deals worth at least $1M, with 19 worth over $10M. In addition, the company reported massive growth for its commercial segment in FQ4'21, with revenue increasing 47% YoY, customer count increasing 200% from 49 to 147, and overall Net Dollar Retention (NDR) of 113%. In the US alone, its commercial segment reported even better revenue growth at 132% YoY, customer count increasing 371% from 17 to 80, and overall NDR of 150%. In view of the significant NDR, we can surmise that PLTR's software is providing critical value to these customers, as the company reports higher revenues per existing and new customers. As a result, PLTR expects its US commercial segment to fuel growth in FY2022, with a 583% growth in headcount so far.
Furthermore, its government segment also reported excellent growth, with 26% YoY growth in revenue and an NDR of 146%. When broken down, its US-based government NDR is at an impressive 141%, while the international government reported even better NDR at 161%. Furthermore, given the current ongoing war in Ukraine, we expect increased government spending on strategic national defense and security moving forward, which will help to further boost its 30% CAGR by 2025.
For example, theUS government spent close to 7% of its Gross Domestic Product (GDP) on defense during the Cold War (1947-1989), which fell to a low of 2.9% during peace times in the late 1990s. For 2022, the US Congress previously projected 2.98% of its GDP for defense spending, which we expect to increase meaningfully due to the ongoing Ukraine war. We expect part of this defense spending to flow to PLTR, given its long-term working relationship with the US. The US Army has previouslyrenewed its contract with PLTR to provide the Vantage AI system for the third year in December 2021, which has been attributed to helping the Army "make data-driven decisions." The AI system helps "command teams plan, avoid, and manage soldiers' risk behaviors, provided leaders with visibility into the Army's COVID-19 inventory and soldier immunization rates, and helped improve the Army's process for weapons accountability."
In addition,Sweden andGermany are also increasing their military spending to at least 2% of their GDP, in response to the Ukraine war. Both governments saw the need to strengthen their defense capability, representing critical policy shifts on their defense strategies. Given how PLTR has also highlighted the inherent need toembrace its new technology to defend the European countries' interests and democracy in the current volatile situation, we expect more countries to adopt its AI-driven analytics tools moving forward.
Thus, we expect PLTR to report significant relevance and adoption ahead. With at least 30% CAGR by 2025, the company's excellent performance in the future should counteract the negative impact of its share-based compensation. Of course, it is assuming that PLTR sticks to its promise of not overly diluting its existing shareholders within the next 24 months, as mentioned by Alex in its latest earnings call.
So, Is PLTR Stock A Buy**, Sell, Or Hold?**PLTR Projected Revenue And Operating Income
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For FY2022, consensus estimates that PLTR will report $2.01B of revenues, representing 30.3% YoY growth. For FQ1'22, the company guided revenues of $443M with an adjusted operating margin of 23%, representing a revenue increase of 2.3% QoQ and 37.5% YoY. Over the next four years, Alex Karp, PLTR's CEO, guided anannual revenue growth of at least 30%, in an estimated range of $4.3B to $5.7B. We expect PLTR to achieve this goal, given how the company has up to 150 salespeople in 2021, with up to 200 expected in 2022, including in Europe, underlining its rapid growth internationally. In addition, given how PLTR saw over 417% YoY increases in its international commercial customers, we expect the company to aggressively grow that particular segment from 2022 onwards.
PLTR is currently trading at an EV/NTM Revenue of 9.77x, lower than its 1Y mean of 23.43x. In line with the recent market correction surrounding tech stocks, the company is also trading at $10.77, just above its 52-week low of $9.74. Its undervaluation may encourage aggressive investors to add to their portfolios. Despite this, the ongoing Ukraine war is causing the market to be bearish, which may cause the stock price of PLTR to further retrace. In these circumstances, conservative investors may choose to wait it out. However, holding off buying anything now could lead to investors missing out as we expect the market to rebound before the war ends.
Therefore, werate PLTR stock as a Buy for aggressive long-term investors only.$Palantir Technologies Inc.(PLTR)$
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