- Palantir is expected to submit its Q1'22 earnings card on May 9, 2022.
- Commercial revenue momentum indicates record results will be released in two weeks.
- I expect Palantir to report free cash flow in the range of $110-115M.
- Palantir's valuation is discounted by 50% compared to last year.
Palantir$Palantir Technologies Inc.(PLTR)$ (NYSE:PLTR)'s first quarter earnings sheet is just two weeks away and I expect the software analytics firm to deliver record results for Q1'22 due to accelerating commercial customer growth. I will go through my Q1'22 estimates and believe the stock is worth buying before earnings!
Palantir achieved record sales of $1.54B as well as impressive revenue growth of 41% year over year in FY 2021. Because of the on-boarding of a large number of new customers, the firm's free cash flow also saw a huge improvement from $(271.9)M in FY 2020 to $424.2M in FY 2021. Strong performance gains were largely attributable to Palantir's commercial business which is seeing accelerating customer acquisition. However, the share price of Palantir doesn't reflect the enormous progress the company has made last year.
I expect impressive results from Palantir's commercial division which the software analytics firm is specifically targeting with its growing sales team. The key reason why I believe Palantir's commercial business is set for record results in Q1'22 is the momentum that has developed within this segment over the course of the last year. While Palantir started off servicing chiefly government clients, the company has understood that the untapped private sector market represents a large and profitable revenue opportunity.
Palantir's commercial segment saw 47% year-over-year revenue growth in Q4'21, showing a continual acceleration throughout FY 2021. Palantir benefits from two factors here: Strong customer acquisition as well as increasing customer spend relating to Palantir's products and services.
Palantir's customer count in the commercial business increased by more than 200% in FY 2021 and the firm added 98 new paying customers to its various platforms… reflecting momentum that I expect to have continued in Q1'22.
Palantir's commercial revenue growth scaled up, especially in the U.S. commercial business, just as government revenue growth started to decelerate.
While Palantir's impressive customer acquisition in the commercial segment is key to the firm's revenue growth, it is worth pointing out that Palantir's net dollar retention rates are impressive as well. Net dollar retention rates measure by how much customers increase their spending, from one period to the other. In Palantir's case, the total net dollar retention rate in FY 2021 was 131%, meaning customers increased their spending by 31% year over year. Palantir's net dollar retention rates are not surprisingly most pronounced in the U.S. commercial segment where the net dollar retention rate was 150% in FY 2021. High net dollar retention rates indicate successful sales efforts on the part of Palantir as well as potential for incremental revenue growth.
The cohort analysis below shows that customers increase their spending on Palantir's products and services over time, but there is one caveat: The newest customer cohorts are increasing their spending exponentially compared to previous customer cohorts. In the U.S. commercial segment, the 2020 cohort tripled its spending from FY 2020 to FY 2021 whereas the 2019 cohort increased its spending only by a factor of 1.5 X.
Palantir's robust customer acquisition and revenue growth in the U.S. commercial segment is due chiefly to investments in sales infrastructure, including the hiring of additional staff. Palantir's headcount went up by a factor of 6.7 X in FY 2021, compared to FY 2020, and it can be expected that these investments will have driven additional revenue and customer growth in Q1'22.
Palantir is guiding for 30% long-term annual topline growth (until FY 2025), but it doesn't provide full-year dollar revenue guidance. It does, however, submit quarterly revenue and margin guidance. For Q1'22, Palantir guided for $443M in revenues and an adjusted operating margin of 23%. With momentum in the commercial business strengthening toward the end of the last year, I believe Palantir will be able to beat its own guidance and report Q1'22 revenues closer to $450M.
More important than revenue projections, at least for me, is free cash flow. FY 2021 truly was a game-changer for Palantir because it moved from free cash flow margins of (25)% in FY 2020 to 28% FCF margins within the span of just twelve months. What this means is that Palantir is now free cash flow positive and new customers that are on-boarded to Palantir's software platforms are starting to make positive FCF contributions. Due to Palantir's strengthening customer acquisition capabilities, I expect Palantir to report around at least $110-115M in free cash flow in Q1'22 which calculates to a 25% FCF margin (based off of Q1'22(e) revenues of $450M).
Valuation
Shares of Palantir went through a significant revaluation over the last year… in large part because investors are less optimistic about post-pandemic revenue prospects for growth companies. I don't believe that revenue growth is slowing for Palantir and the company will likely reaffirm its 30% long-term topline growth goal when it submits its Q1'22 earnings card in May.
Based off of expected revenues of $2.60B in FY 2023, Palantir's shares are valued at a P-S ratio of 9.3 X. I believe that it is justified to pay a high sales valuation factor for Palantir given its enormous progress (accelerating customer acquisition in the commercial business, revenue/FCF growth and launch of new products) the firm has made in just the last twelve months.
Risks with Palantir
The biggest risk with Palantir, as I see it, is the valuation. Palantir has huge potential to penetrate the private sector market and the company has made significant inroads with commercial clients in FY 2021. A soaring number of new U.S. commercial customers and sky-high net retention rates prove that Palantir is on to something. However, Palantir's commercial growth prospects are not cheap. Should Palantir's topline growth slow before FY 2025 or should free cash flow margins decline, Palantir's shares could revalue lower.
Final thoughts
I believe Palantir is set to deliver a very strong Q1'22 earnings card in May, for three reasons:
1. Customer acquisition in the commercial segment is accelerating due to investments in sales infrastructure,
2. Net dollar retention is super strong，
3. Net new customer acquisitions in the first quarter are likely to have made a positive FCF contribution. While Palantir is not cheap, the stock is a strong buy before earnings!
Comments