Summary
Close to two-thirds of the sell-side community have a HOLD rating on PLTR.
The prospect of greater AI regulation bodes well for Palantir.
A number of important financial metrics have improved, and the financial outlook looks encouraging.
The risk-reward on the charts looks attractive.
Big data Network Abstract concept
Introduction
At the outset, let me state that I’m well aware that a lot of retail investors pay scant regard to the views held by the Wall Street community; nonetheless, whether you respect their opinions or not, the general positioning of the sell-side analyst club can often prove to be quite instrumental in directing large flows towards and away from a certain stock.
If one looks at the current sell-side positioning on the Palantir Technologies (NYSE:PLTR) stock, it’s fair to say that things are largely lukewarm. Currently, most of the sell-side analysts (close to two-thirds of the 14 analysts) who cover Palantir, are sitting on the fence, with a HOLD rating on the stock.
I feel there’s potential for this to change and will attempt to cover some of the notable themes which may prompt the sell-side to turn more constructive on PLTR.
Well-poised for increased adoption
Many think that AI is just a fad, but recent surveys run across the globe show that enterprise adoption of AI isn’t going away and only continues to grow. The IBM Global Adoption Index provides some context on the global penetration of AI at the enterprise level over time; last year, the adoption rate expanded by 400bps to hit 34%. Meanwhile, it is believed that another 42% of those organizations surveyed, were actively exploring AI.
If AI penetration continues to inch up, I’d like to think that Palantir could be one of the key beneficiaries that could profit from this trend. Quite unlike a number of alternatives that have only mushroomed over the last few years, Palantir has been in this business for two decades now, building, finetuning, and implementing their underlying AI infrastructure in some of the most rigorous industries.
AI adoption index
A common refrain for many enterprises that are skeptical about AI is that it isn't trustworthy, transparent, or doesn’t yet have the requisite capabilities to reduce bias. Besides, crucially, whilst most of the plain vanilla AI algorithms may work well in a non-regulated public network, they struggle to get the job done under private networks with growing regulatory scrutiny. On the other hand, Palantir's AI infrastructure has already built-up ample credibility and trust in some of the most highly scrutinized and regulated industries such as the military and health; you would think a lot of enterprises would make a beeline for the company’s services if regulatory impetus continues to gain traction. It’s worth noting that earlier this month, the US Chamber of Commerce pushed Congress to come up with suitable AI regulations and legislation. If this comes to fruition, quite a few of Palantir’s smaller competitors may fall by the wayside.
It’s also worth noting that on the Q4 call, PLTR’s management mentioned that they were witnessing positive momentum with smaller clients signing up for longer-term enterprise deals. Data from the last two quarterly presentations show that the company signed over 133 deals in aggregate with a deal size of less than a million.
Deal size
Quarterly Presentation
In a difficult economic environment with constrained budgets, enterprises would rather tap the AI expertise of a Palantir that can get things running straight away, rather than invest large dollars to ramp up in-house AI efforts that may take years to come to fruition. A low ticket size of $1m may not set tongues wagging, but what’s good about this strategy, is that once Palantir get clients in the door at a lower price point, it gives them the opportunity to demonstrate additional capabilities and cross-sell other services over time, thus ensuring customer stickiness. Do consider that Palantir already has a pretty good track record of keeping its existing clients happy; traditionally its net dollar retention (NDR) has invariably exceeded 100%, and at the end of last year it stood at 115%. For the uninitiated, the NDR gives you a sense of recurring revenue over time, after accounting for customer additions, downgrades, and churn.
Improving financials
While the underlying story looks promising, you also want to see some progress with some of the key financials, and PLTR looks to have made some headway here as well.
The company closed the final quarter of the last year, in a GAAP profitable state, and now believes it could end FY23 as a whole in a GAAP profitable state as well. If that happens, you’re looking at a company that is hitting its targets two years ahead of schedule. Consensus estimates point to an FY23 positive EPS figure of $0.012, followed by another two years of positive EPS growth through FY25, at an impressive 2-year CAGR of 64%! It isn’t just positive GAAP profitability that’s on the cards; management also expects operating margin improvement to come through this year, with even consensus expecting EBITDA margins to improve every year through FY25.
YCharts
In addition to all that, when you juxtapose Palantir's revenue outlook in FY24 to some of its other publicly listed peers, it looks quite promising; with the exception of Snowflake (SNOW), PLTR's expected revenue growth for FY24 is better than most other options in this space.
YCharts
Then, critics of PLTR have previously expressed their concerns over the level of stock-based compensation (SBC) that the company doles out, but this is less of a risk now. The image below shows how SBC on a trailing twelve-month basis has dropped by almost 3x from the levels seen in mid-2021. Also, whilst SBC accounted for 62% of group revenue back then, these days it is only one-fourth of the revenue base.
SBC
The changing texture of the SBC too gives us a sense of where Palantir is in its strategy and broad lifecycle. A couple of years back R&D related SBC accounted for close to 28% of total SBC; these days, it is a lot lower at 17%, whilst greater impetus has been given to sales and marketing-related expenses, highlighting where the company's priorities lie. When your compensation base has a sizeable chunk of R&D-related expenses it shows that you still have work to do to build a credible offering; the shift here implies that management is confident about the R&D foundations in place, and now, execution at the sales function could be key in making a mark.
SBC breakup
Finally, it’s also worth highlighting that the company continues to build on its superior cash and investment balance, which recently just crossed the $2.6bn mark. For the uninitiated, PLTR is a debt-free company, a quality that should not be underestimated in an excessively levered system.
The Risk-reward Is Still Attractive
The risk-reward equations across both PLTR’s relative strength (RS) chart and standalone chart, further support the buy case. The chart below gives you a sense of how oversold the PLTR stock looks relative to its North American tech peers; the RS ratio is now almost 2.5x lower than the mid-point of the life-long range.
Stockcharts
On the standalone weekly chart, we can see that PLTR stock’s price imprints have taken the shape of a falling wedge. If you want to position for a breakout from this falling wedge, the current price levels look like a decent zone to build a position, rather than entering at a point close to the upper boundary. Even if the stock fails to cross the upper boundary and you’re looking to play the two boundaries, the risk-reward equation at current price levels looks quite tantalizing at 1.91x.
Weekly chart
Investing
Finally, even though this doesn’t necessarily have to mean a great deal, I thought it would be interesting to highlight that after months and months of reducing their “net” positions in the PLTR stock, insider ownership moved up for the first time in a long time.
YCharts
$Palantir Technologies Inc.(PLTR)$
Source: Seeking Alpha
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