Palantir: This Is A Game Changer

seekingalpha2022-05-27

SummaryPalantir’s stock has been plummeting despite the impressive performance of the underlying business.The overall market selloff is the only thing that prevents Palantir’s shares from appreciating...

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NP_YT
·2022-05-27
Ok
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TeslaLegend
·2022-05-27
Nice
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Guardian_J
·2022-05-27
Woo
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3701lendros
·2022-05-27
I'm still holding on to it and waiting for them to get better. Give them some time.
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That article has covered only Palantir's relations with the governmental and defense agencies and didn't highlight the company's connection with non-state actors. At the same time, it ignored some of the issues such as the excessive SBC policy, stock dilution, and the constant selling of shares by insiders, which bears have used to justify their short positions. That's why in this article I plan to extend my bullish thesis by tackling those issues, showing why those key risks are no longer relevant at this time, and discussing the opportunities that Palantir could seize to continue to expand its market share in the big data analytics field.Proving Doubters WrongDespite the decline of Palantir's stock price in recent months, the company's underlying business has been showing exceptional performance. While lots of bears were skeptical regarding Palantir's ability to acquire new clients from the private sector due to its lack of experience working with non-state actors, the latest Q1 earnings results showed that it's no longer the case. In recent quarters, the number of clients that use Palantir's Foundry platform to organize and analyze their internal data has accelerated, as big businesses around the world are now required to better organize their enterprises in order to tackle the rising economic challenges along with internal inefficiencies. In Q1 alone, Palantir increased the number of its commercial clients by 207% Y/Y to 184 clients, which is a sign that its software is in high demand amongst the big organizations.The top-line performance didn't disappoint as well. Total revenues in Q1 increased by 31% Y/Y to $446 million, out of which commercial revenues accounted for $205 million, as they grew at a record 54% Y/Y. The accelerated growth of the commercial business along with the increase in customer count in Q1 proves that Foundry is indeed a useful tool for big organizations, which helps them to better organize and analyze their data. Another thing that should be mentioned is that at the end of Q1 Palantir managed to increase the average revenue that it generated from its 20 biggest clients by 24% Y/Y to $45 million, which shows that its solutions are indeed scalable.Fixing Supply ChainsGoing forward, as China's supply chains collapse due to the reemergence of Covid-19 in the country, fixing supply chain issues is going to be vital for businesses in order to minimize risks. In the latest earnings calls, management of companies from the S&P 500 Index has been actively citing supply chain issues as one of the main current risks to their businesses. To tackle this issue, an international effort has been launched to boost production outside of China, while companies like Apple (AAPL) are already looking for ways to shift production elsewhere. The problem is that fixing supply chain issues is not an easy task, and the ongoing chip shortage crisis that started earlier last year serves as a great example of it.That's where Palantir comes into action. Thanks to Foundry, Palantir is able to help its clients fix supply chain issues and better optimize their logistics. The company already has successful cases where Foundry helped to utilize the shipping logistics, reduced rail disruptions, and even optimized production across the whole supply chain of a customer by using the existing data. The latest signing of a contract with one of the biggest legacy automakers Stellantis (STLA) to improve the performance of the business's supply chain is proof that Foundry can efficiently tackle major global issues for its customers. Since supply chain issues will continue to disrupt the international trade, while businesses will be moving their production to other countries, Palantir's software will continue to be in high demand.Insider Selling And SBC Are No Longer A Major IssueWhile Palantir's business showed an impressive growth rate in recent years, its stock nevertheless has plummeted. The main justification for such a decline is the overall market selloff, which dragged most stocks down since the beginning of the year. Unfortunately, Palantir has no control over it so it can't do much to tackle this. What it can do is decrease the massive selling of its stock by insiders and optimize the excessive stock-based compensation program to improve its bottom-line performance, which it has been successfully doing so far.Back in 2021, Palantir's CEO Alex Karp has been exercising his options issued a decade ago by transferring them into shares at a discount to the market price and selling them on an open market, which has created a selling pressure for the stock. The insider data shows that in Q4 alone he sold over $100 million worth of Palantir shares. However, once those options expired in early December - he stopped selling his shares, and the selling pressure which he created for the stock in the past no longer exists. On top of that, Alex Karp along with other insiders continue to own slightly more than 10% of the outstanding shares combined, which indicates that they still have faith in Palantir's ability to create shareholder value.As for the excessive stock-based compensation policy, it has also improved in recent quarters, and Palantir's investors no longer finance the company's employees at a scale similar to the one that we've witnessed more than a year ago. The Q1 earnings report clearly shows that overall SG&A expenses, which include share compensations, decreased by 5% Q/Q to $302.8 million, while the operating loss of $39.4 million and a net loss of $101.4 million were the lowest since the company's direct listing in late 2020. This is a clear indication that Palantir is slowly moving towards profitability. In addition, the revenue per share has increased Y/Y, which signals that the revenue growth rate finally outpaces the stock dilution and the company's shares are becoming more attractive to own.ValueConsidering that insider selling from Alex Karp no longer creates an additional selling pressure for the stock, while the stock-based compensation decreases - it becomes easier to justify Palantir's premium valuation. While for some Palantir might appear to be overvalued, as it trades at nearly 8 times its forward sales, the company's aggressive growth in the past indicates that it should be valued as a growth company and not as a value stock.In 2021, Palantir's revenues have increased by 41% Y/Y to $1.54 billion, which helped the company to achieve its long-term goal of growing its revenues annually by 30% or above through 2025. In 2022, Palantir is once again on track to achieve this aggressive growth target. As I've mentioned before, in Q1 its revenues already increased by 31% Y/Y to $446 million, and in Q2 are expected to grow by around 25% Y/Y to $470 million in the base scenario only. The base case scenario represents a conservative outlook, so the company could easily exceed those expectations. However, even if the growth in Q2 stays at 25% Y/Y, Palantir will still be able to grow at over 30% in the second half of the year, which historically has generated the most amount of revenue during a fiscal year. Therefore, even in the current environment, Palantir is able to show solid growth and improve the business's overall financials. Add to this the fact that the company has no debt, $2.5 billion in cash reserves, and $1.2 billion in remaining performance obligations and you conclude that Palantir is a solid stock to own at the current levels.RisksOne of the major downsides of Palantir is the high contract cost. While the company has a relatively small number of customers, all of them pay millions to run Palantir's software. During growth periods it was not that big of a deal, as the latest earnings results showed that customers were willing to pour more money into Palantir in order to use its solutions to better organize and analyze the data that their organizations collect. However, during the period of an economic decline, it becomes a serious issue, as client cut their costs and it becomes harder for the business to grow at an aggressive rate. Since the latest economic data shows that we could enter a recession later this year, a loss of even one major client would hurt Palantir financially, as it wouldn't be able to quickly replace the lost revenue in a turbulent environment. In addition, considering the fact that it's much easier for commercial customers to break up their contracts with Palantir in comparison to the government agencies, all that growth in the private sector could quickly vane as well. In the past Palantir has already lost Fortune 500 clients such as Coca-Cola (KO) and Home Depot (HD), so there's no guarantee that other big names won't abandon the company as well if a crisis begins. Investors need to be aware of this before opening a position in Palantir.The Bottom LineThis article is an extension of my previous article, in which I then discussed Palantir's opportunities in the defense industry. To extend my bullish thesis, I decided to highlight Palantir's connections with the private sector in this article and at the same time covered major risks such as insider selling and the excessive SBC policy, both of which are not as relevant anymore as they were before.Going forward, Palantir showed that it's able to grow its business at a double-digit rate and even in the base case scenario it'll still be able to show impressive gains. On top of that, with a recession-proof balance sheet, the company is more than ready to navigate through the upcoming periods of uncertainty without hurting its financials much. For that reason, I continue to own the company's stock and even though there's a possibility that Palantir's shares could trade in a distressed territory for a while due to things that are outside of its control, I still think that the company will be able to create significant shareholder value in the long run.","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":9025836380,"gmtCreate":1653655221440,"gmtModify":1676535321725,"author":{"id":"3572043809285615","authorId":"3572043809285615","name":"NP_YT","avatar":"https://static.itradeup.com/news/fad9f70abb174e3e09e4caf3f9c0c13a","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3572043809285615","authorIdStr":"3572043809285615"},"htmlText":"Ok","listText":"Ok","text":"Ok","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9025836380","repostId":2238632988,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9025189765,"gmtCreate":1653638214657,"gmtModify":1676535319248,"author":{"id":"3572489627147183","authorId":"3572489627147183","name":"TeslaLegend","avatar":"https://static.tigerbbs.com/180ad6f06095bcbf2b6594d26c494752","vip":1,"hat":"https://static.tigerbbs.com/f84859c65fc2d7681e28f6b8e9b0535a","crmLevel":4,"crmLevelSwitch":1,"idStr":"3572489627147183","authorIdStr":"3572489627147183"},"htmlText":"Nice&nbsp;","listText":"Nice&nbsp;","text":"Nice","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9025189765","repostId":2238632988,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9025937180,"gmtCreate":1653611037340,"gmtModify":1676535313441,"author":{"id":"3577512169946317","authorId":"3577512169946317","name":"Guardian_J","avatar":"https://static.tigerbbs.com/d5732d3790ba7ded4910ae093423ed15","vip":1,"crmLevel":7,"crmLevelSwitch":1,"idStr":"3577512169946317","authorIdStr":"3577512169946317"},"htmlText":"Woo","listText":"Woo","text":"Woo","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9025937180","repostId":2238632988,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9022753873,"gmtCreate":1653598592292,"gmtModify":1676535309118,"author":{"id":"4095511153546410","authorId":"4095511153546410","name":"3701lendros","avatar":"https://community-static.tradeup.com/news/5a666ffaf99dc1bc6a2bb3ddb0ad9f59","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"4095511153546410","authorIdStr":"4095511153546410"},"htmlText":"I'm still holding on to it and waiting for them to get better.&nbsp;Give them some&nbsp;time.","listText":"I'm still holding on to it and waiting for them to get better.&nbsp;Give them some&nbsp;time.","text":"I'm still holding on to it and waiting for them to get better. Give them some time.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9022753873","repostId":2238632988,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":37,"commentSize":4,"repostSize":0,"favoriteSize":2,"likeStatus":false,"favoriteStatus":false}}