Palantir Could Be One Of The Few Deals Of The Decade

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Palantir Could Be One Of The Few Deals Of The Decade

seekingalpha2023-11-17

Palantir has exhibited robust financial growth over the past six years, with an impressive average revenue growth rate of approximately 42.81%, indicating a strong and expanding market presence.The ...

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(NYSE:PLTR), I will elucidate the compelling reasons why Palantir remains a \"strong buy\" even after experiencing a substantial rally of over 169%. According to my calculations, should analysts' estimates materialize, the stock has the potential to ascend to $49.6, reflecting a significant upside. In light of this, I undertook a secondary model, revealing that while Palantir may be slightly overvalued (by 3.4%), it still holds the potential to yield annual returns of up to 18%. Consequently, considering these factors, I have determined to categorize Palantir as a \"strong buy.\"OverviewPalantir, a prominent software development company, specializes in data analytics. This entails the creation of software designed to analyze vast datasets, extracting valuable insights that can inform decision-making processes. There are even myths extending to events such as the assassination of Osama bin Laden and the exposure of Bernie Madoff's Ponzi scheme.Palantir boasts a diverse product portfolio comprising Gotham, Foundry, Apollo, and the newly introduced AIP. The functionality of each segment will be expounded upon in the following sections.GothamGotham stands as a powerful tool designed to unveil concealed patterns within diverse datasets, spanning from signals intelligence to confidential informant reports. Its primary objective is to empower users in identifying potential threats, fostering collaboration among analysts and operational personnel, and aiding in the strategic planning and execution of real-world responses. Gotham has garnered widespread adoption across various government functions and has found practical applications in the commercial realm, particularly within the financial services industry for the investigation of fraud cases.FoundryIn contrast, Foundry serves as the central operating system for data, with the overarching goal of transforming organizational operations. It provides individual users with a unified platform to seamlessly integrate and analyze data, emphasizing speed for experimenting and testing new ideas. Foundry addresses common challenges encountered in data projects by offering a user-friendly backend for constructing data pipelines, featuring a graphical interface that enhances tracking and tracing for improved comprehension.ApolloOriginally developed to facilitate continuous software delivery across a spectrum of environments-be it cloud, on-premises, or rugged settings-Apollo focuses on expediting secure software deployment and updates within businesses. In 2021, Apollo was introduced as a commercial solution, enabling customers to securely deploy their software in diverse environments. Serving as a centralized control layer, Apollo orchestrates the continuous delivery of features, security updates, and platform configurations, providing a comprehensive solution for businesses seeking efficient and secure software management.AIPFinally, the latest addition to Palantir's suite is Palantir AIP, unveiled in August 2023. This innovative product is essentially a large language model that allows clients to pose questions and receive automated responses from the AI. Users can access this cutting-edge tool directly through the user portal, showcasing Palantir's commitment to advancing technological solutions and enhancing user interaction with artificial intelligence.MarketData analytics, as its name suggests, involves the processing of large quantities of both structured and unstructured data with the goal of extracting valuable insights. These insights, in turn, serve as a foundation for making informed and critical decisions.The data analytics market is poised for substantial growth, with an anticipated CAGR of 18.77% from 2023 to 2029. During this period, the market is projected to achieve a remarkable valuation of $655.53 billion. This robust growth underscores the increasing significance of data analytics in shaping strategic decision-making processes across various industries.StatistaFinancials (In millions of USD unless stated otherwise)Palantir's Financial Performance: Over the past six years, Palantir has experienced remarkable growth, with an impressive average revenue growth rate of approximately 42.81%. Concurrently, its net income has demonstrated a not huge but still decent growth trajectory at around 12%. The company on the brink of a full year of GAAP profitability.Author's CalculationsProfitability Metrics: Palantir's margins have witnessed substantial expansion, signifying the company's operational profitability. Notably, the operating margin currently indicates a profitable operation. However, it's noteworthy that the margins don't align with typical figures for companies primarily engaged in software development, which generally hover around 20% or more. Presently, the net income margin is at -6.93%, while the operating margin stands at 1.71%.Author's CalculationsBalance Sheet Strength: Palantir boasts a robust balance sheet, highlighted by substantial cash reserves totaling $3.2 billion and an absence of long-term debt. This financial strength positions Palantir favorably, allowing for potential debt issuance without compromising the integrity of its balance sheet, a crucial factor in navigating challenging economic scenarios.Author's CalculationsCash Flow and Free Cash Flow Margin: Palantir currently generates positive cash flows, amounting to $465 million. The free cash flow margin stands at a commendable 21.9%, indicating efficient management of cash resources. This positive cash flow is reflected in the \"free cash flow components\" table, showcasing an increase in cash from operations, a metric indicative of sustainable and genuine growth, as opposed to aggressive cost-cutting measures.Author's CalculationsAuthor's CalculationsAuthor's CalculationsOverall Financial Health: In summary, Palantir's financial health is robust, underscored by its positive cash flows, strong balance sheet, and a trajectory towards turning negative net income into positive figures. This positive shift is anticipated to further enhance Palantir's overall financial standing.Valuation (In millions of USD unless stated otherwise)In this valuation assessment, two DCF models will be employed. The first model integrates analysts' revenue and EPS estimates for FY 2024 and FY 2025, along with the anticipated 5-year EPS growth rate and expected revenue growth rate. The second model operates on the assumption that Palantir could grow at the projected rate of the data analytics market, which stands at an impressive 18.77%.The table below outlines all the variables necessary for calculating the WACC. Additionally, the CapEx, Depreciation & Amortization (D&A), and Interest expenses are computed using margins linked to revenue.TABLE OF ASSUMPTIONS(Current data)Assumptions Part 1Equity Value3,190.00Debt Value236.30Cost of Debt2.12%Tax Rate21.00%10y Treasury4.80%Beta1.88Market Return10.50%Cost of Equity15.52%Assumptions Part 2EBITTax14.70D&A32.80CapEx15.20Capex Margin0.72%Assumption Part 3Net Income-147.30Interest5.00Tax14.70D&A32.80Ebitda-94.80D&A Margin1.54%Interest Expense Margin0.24%Revenue2,125.3Click to enlargeAnalysts' EstimatesIn this valuation model, the primary objective is to ascertain Palantir's fair value by considering analysts' EPS targets for FY 2023 and FY 2024, which are set at $675.48 million and $783.56 million, respectively. These values are derived by multiplying the EPS targets of $0.25 and $0.29 by the 2.233 billion shares outstanding.Additionally, analysts project a 3-5 year EPS growth of approximately 71.90%, which will be utilized to calculate the net income for the period spanning 2025 to 2028.Seeking AlphaNet IncomePlus TaxesPlus D&APlus Interest2023$558.25$675.48$709.77$715.002024$647.57$783.56$817.85$823.082025$1,113.17$1,346.94$1,395.96$1,403.432026$1,913.54$2,315.39$2,374.13$2,383.092027$3,289.38$3,980.15$4,050.56$4,061.292028$5,654.45$6,841.88$6,926.26$6,939.13^Final EBITA^Click to enlargeAuthor's CalculationsAccording to this model, Palantir presents a substantial upside potential of up to 154.5%, an impressive figure. The calculated fair value stands at $49.6, surpassing even the all-time high of $35.18 recorded in January 2021.The model further suggests that the stock could potentially reach a price of $107.2 by 2028, implying annual returns in the order of 90.15%. It is worth noting that this valuation may attract skepticism, given the seemingly optimistic projection that appears extraordinary in real-world terms.My EstimatesIn this second, more conservative model, the focus is on projecting Palantir's revenue growth to align with that of the data analytics market, standing at 18.77%.The table below outlines all the essential variables required for calculating EBITDA. Net income is calculated using a net income margin of 43%, tethered to revenue, implying that net income will also grow at a rate of 18.77%.RevenueNet IncomePlus TaxesPlus D&APlus Interest2023$2,222.0$675.48$817.33$851.62$856.852024$2,650.0$783.56$948.11$982.40$987.632025$2,992.1$1,286.61$1,556.80$1,602.98$1,610.012026$3,378.4$1,452.71$1,757.78$1,809.92$1,817.872027$3,814.5$1,640.26$1,984.71$2,043.58$2,052.552028$4,307.0$1,852.01$2,240.94$2,307.41$2,317.54^Final EBITA^Click to enlargeAuthor's CalculationsAccording to this model, Palantir appears slightly overvalued, suggesting a need for a 3.6% decrease from the current stock price of $19.5 to reach the fair price of $18.8. Despite this, the stock still holds the potential to yield solid annual returns of around 18.6% until it attains the projected future stock price of $37.6.Moreover, if we calculate an average from the two present fair value prices of the two models ($49.6 and $18.8), we arrive at a stock price of $34.20, indicating a notable 75% upside potential.Risks to thesisTo achieve the outlined target, as demonstrated, Palantir would require a net income of $675.48 million for 2023, translating to the need to generate a GAAP EPS of $0.20 by Q4 2024.Should a DCF model be applied to this scenario, it would indicate that Palantir is even more overvalued than the 3.4% suggested by the second model labeled \"My Estimates.\" Notably, the stock trajectory indicates that analysts may be considering non-GAAP metrics over GAAP, with GAAP metrics potentially being factored in only during market downturns. This presents a notable risk for the stock.Author's CalculationsHowever, recognizing the inherent non-GAAP nature of EPS and its value in better assessing a company's unique circumstances due to their inherent differences, I recommend a \"strong buy\" rating for Palantir. This recommendation is founded on the second model, indicating a downside as minimal as 3.4% and annual returns of 18.6%, which is deemed as very respectable and provides a satisfactory safety margin in the analyst's perspective.ConclusionIn conclusion, a comprehensive analysis of Palantir's financial performance and valuation reveals a company that has experienced substantial growth over the last six years, boasting an impressive average revenue growth rate of around 42.81%. The company's margins have expanded significantly, indicating operational profitability, and its balance sheet stands robust with $3.2 billion in cash reserves and no long-term debt. Palantir's positive cash flows, amounting to $465 million, and a free cash flow margin of 21.9%, underscore its efficient financial management.Two distinct valuation models were employed to gauge Palantir's intrinsic value. The first model, leveraging analysts' projections, suggests a potential upside of 154.5%, with a fair value of $49.6 and an ambitious future stock price of $107.2 by 2028. The second, more conservative model, tied Palantir's growth to the data analytics market, indicating a slight overvaluation but still projecting solid annual returns of 18.6%. While potential skepticism surrounds these valuations, an average of the two fair value prices yields $34.20, presenting a notable 75% upside. The conclusion is that I recommend a \"strong buy\" rating for Palantir, taking into account the minimal downside of 3.4% suggested by the second model, coupled with the substantial annual returns of 18.6%, demonstrating a perceived sufficient safety margin. However, it's crucial to acknowledge the risks associated with potential reliance on non-GAAP metrics by analysts, posing a key consideration for investors in Palantir.","kind":"highlight","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":[],"hasMoreComments":false,"newsSizeData":{"likeSize":24,"commentSize":0,"repostSize":0,"favoriteSize":3,"likeStatus":false,"favoriteStatus":false}}