Palantir: Unique Company With A Big Threat

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The banal value of Palantir Technologies (NYSE:PLTR) accrued by much than 15% pursuing nan merchandise of nan company's outlook for FY 2023. I judge that Palantir provides fantabulous services and options to nan nationalist and backstage sectors. It is important for investors to comprehend really and why Palantir's services usability and are processed. The institution has a important competitory advantage, but we will besides talk immoderate threats. The business is increasing steadily and consistently and became profitable astatine nan extremity of nan year, but it pays its managers and labor a monolithic magnitude of stock-based compensation. The issuance of communal banal could beryllium a awesome rumor for further banal value appreciation.

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Government vs. commercialized services

The company's solution has been criticized for being "suitable" only for nan government. However, this isn't nan case. The company's halfway services became indispensable to numerous different businesses and contributed to their growth. The strategy is straightforward. In fiscal twelvemonth 2022, commercialized gross accrued 29% year-over-year to $834 million, while authorities gross accrued 19% year-over-year to $1,072 million.

Palantir authorities and commercialized revenues

Palantir authorities and commercialized revenues (Palantir (4Q2022 Presentation))

When calculating nan selected percent of full nett sales:

  • In 2021, authorities related revenues reached 58%,
  • In 2022, authorities related revenues reached 56%.

We judge that nan authorities stock will diminution complete clip and that successful FY 2023 it could beryllium beneath 50% owed to beardown customer growth. The customer guidelines accrued by 30 nett caller customers successful Q4 2022, up 9% quarter-over-quarter, but nan institution reported 55% maturation year-over-year. These statistic for 4Q2022 are massive. We spot a coagulated business betterment overall. However, nan important point to statement is that this number represents each authorities and commercialized customers.

Palantir Customers

Palantir Customers (Palantir (4Q2022 Presentation))

According to awesome article by Dominic Rinaldi connected Palantir, successful October of 2022, nan Defense Information Systems Agency (DISA) granted Palantir's national unreality work offering a DOD Impact Level 6 (IL6) Provision Authorization. This is DISA's highest level of certification, and Palantir joins Microsoft (MSFT) and Amazon (AMZN) Web Services arsenic nan only unreality providers pinch IL6 accreditation.

This is not only a game-changer for authorities contracts, but besides a cardinal constituent for commercialized customers. It's a guarantee that nan institution is tin of processing and analyzing customer information successful a unafraid manner, thereby gaining nan customer's authorization for early cooperation.

Profitability, 4Q2022 results, and an updated outlook

The banal of Palantir accrued by much than 15% pursuing nan 4Q2022 net report, successful which nan institution surpassed expectations and provided an optimistic outlook for FY 2023. One of nan astir important surprises was nan first-ever affirmative quarter. The company's gross was $508 million, and its non-GAAP EPS was 0.04 USD. The income outlook for FY 2023 is little astatine $2.18 - $2.23 cardinal (compared to nan statement estimate of $2.29 billion), but nan profitability should importantly improve. The institution anticipates an "adjusted" income from operations betwixt $481 and $531 million, nan first twelvemonth successful its history pinch a affirmative nett income.

The business has an outstanding way record. The income are expanding annually pinch a very dependable inclination and without important fluctuations. I judge dependable and slow maturation is often preferable to short-term spikes successful income aliases nett income, arsenic companies tin acquisition "overhype" and make mediocre guidance decisions. This awesome inclination is nan facet of Palantir's history that we appreciate. The gross maturation is experiencing a "slowdown," but this is wholly expected arsenic nan institution earns a important larger information of revenues twelvemonth aft year. The expected income maturation for fiscal twelvemonth 2023 is betwixt 14 and 17% annually.

Annual income pinch projection for FY 2023

Annual income pinch projection for FY 2023 (Author´s calculation)

For FY 2022, gross accrued by 24%, compared to 41% for FY 2021. However, I firmly judge nan institution will execute double-digit maturation successful nan adjacent 1 to 3 years. We tin spot a awesome way grounds not only based connected nan company's yearly results, but besides by analyzing its quarterly performance. Honestly, location are not galore companies that tin declare to person had specified a singular quarterly capacity inclination arsenic Palantir. Examine nan improvement below. It is dependable and not very volatile.

In addition, during nan past 3 quarters of 2022, nan institution began to amended its profitability, resulting successful its first ever profitable quarter. It's not a staggering figure, but it's a important accomplishment fixed that galore bears predicted nan banal would ne'er beryllium profitable. We judge it will beryllium challenging to execute successful nan upcoming quarters, but pinch gross still connected nan rise, it surely appears doable.

Palantir quarterly way record

Palantir quarterly way grounds (Author´s calculations.)

However, location is nary assurance that nan profitability inclination will proceed successful nan aforesaid manner, but I presume that nan institution will beryllium profitable and person a agleam early wrong nan adjacent 1 to 3 years. Because its fantabulous products and services are often "game-changers" for businesses. Additionally, for government.

In my opinion, it is not difficult for Palantir to go profitable if it reduces its stock-based compensation (SBC) program, arsenic it decreases nett income (and is simply a non-cash expense). Also for this reason, guidance presents adjusted nett income results, arsenic nan results are adjusted for SBC.

Despite nan truth that quarterly margins tin beryllium misleading, location is notable progress. In nan last 4th (4Q2022), nan institution achieved a profitable outcome, which resulted successful a important summation successful margins.

Palantir´s margins.

Palantir´s margins. (Author´s calculation.)

While it's still a bad sign, arsenic nan company's wide capacity is negative, location is simply a affirmative trend, and I fishy fiscal years 2023 and 2024 will beryllium important for a turnaround. Keep successful mind, however, that a important profit separator is astir apt not nan management's apical privilege astatine this time. That Palantir will ne'er beryllium profitable was a changeless refrain among bears. However, nan CF is what matters most, and we will beryllium capable to straight observe wherever nan institution spends its money.

Stock-based-compensation (SBC)

As a reward for guidance and employees, Palantir is paying excessively overmuch successful stock-based compensation (SBC) successful my view. This is 1 of nan company's biggest problems. It paid retired $564 cardinal successful FY 2022, $778 cardinal successful FY 2021, and $1,270 cardinal successful FY 2020. Despite nan declining trend, SBC will proceed because nan institution wishes to reward its guidance and employees. This is nan superior Palantir policy. But it ought to beryllium reduced. The rumor is that SBC is accomplished via equity pool, aka caller banal issuance (stock dilution).

Palantir - SBC and banal dilution

Palantir - SBC and banal dilution (Author´s calculation)

We tin spot from nan CF connection really overmuch successful SBC nan institution gave to labor and guidance versus really galore shares it issued (or diluted). As we tin see, dilution was nan lawsuit successful 2020 and partially successful 2021, but successful 2022, location was only a insignificant banal dilution (which amounts to 86 million) that could lend to nan wide SBC. The truth is that nan institution has an highly precocious SBC ratio.

SBC arsenic a percent of revenues is very elemental to calculate. During nan 3rd 4th of 2020 and passim 2020 and 2021 arsenic a whole, nan SBC had played a important role. It was besides nan consequence of an IPO. Moreover, successful my opinion, it was caused by ridiculous valuations, and I deliberation guidance was alert of this, truthful they utilized it for this purpose. In specified a turbulent time, I don't deliberation it's excessively bad. Investors must ever beryllium alert of valuations that are absurd.

SBC is acceptable successful my sentiment if it is not materially realized done nan issuance of communal stock, aliases via banal dilution. When a institution is successful trouble, it often serves arsenic an unpopular root of caller CF. Despite SBC's precocious measurement of engagement, nan issuance of communal banal successful erstwhile quarters for FY 2022 has been importantly reduced. Compared to precocious 2021, this is simply a amended scenario. From this vantage point, it is preferable to analyse nan CF statement, which provides importantly much accusation than nan income statement.

Cash Flow

The company's astir important connection is listed successful nan array below. Yes, I work together that nan Income Statement is important; however, owed to beardown SBC and banal dilution, nan CF is considerably much important to us.

In erstwhile years, nan company's nett income decreased, aliases arsenic galore bears say, it was "unprofitable." However, I thin to partially disagree. It is not because nan institution did not do well, because Palantir made a batch of money. The superior logic for nan antagonistic nett income is nan precocious SBC expenses, which are non-cash expenditures. Not nan ineffective business model. This is besides nan logic why SBC must beryllium added successful nan rate from operations, arsenic location has been nary rate outflow from nan company. It is evidently nan logic why nan Net Income for Fiscal Years 2021 and 2022 has been negative.

As a result, rate from operations for fiscal years 2021 and 2022 are solid. In addition, nan institution made a important finance successful 2021. Moreover, nan institution repaid its indebtedness successful full, which helped to fortify nan equilibrium sheet. However, rate has besides been utilized for nan SBC program, which I judge is inappropriate for investors. However, arsenic mentioned successful nan preceding graph, dilution arsenic a percent of revenues had decreased importantly during 2022, which is highly affirmative and is simply a acold much important metric than SBC.

On nan different hand, it does not warrant that, successful my view, SBC is still perfectly precocious compared to different exertion companies.

Palantir CF Statement

Palantir CF Statement (Seeking Alpha)

Summary, valuation and risks

I judge that Palantir's business model, on pinch its services and products, are excellent. I americium optimistic because nan institution possesses thing exceptional. The company's fantabulous gross trend, caller orders, and dependable and slow maturation are nan 2nd logic I for illustration it. The revenues are not volatile and are rather predictable. Moreover, nan institution generates a important magnitude of rate from operations, which is importantly much important to maine than nan arguably misleading Income Statement. It is misleading successful my individual sentiment because SBC is chiefly responsible for nan truth that nan Income Statement often results successful antagonistic EPS, which is existent connected paper. The CF connection reveals a different story.

I judge nan institution tin easy meet its profitability projections if it continues connected its existent way and SBC is somewhat reduced. What I dislike is nan unusually precocious SBC arsenic a percent of revenues, which tin beryllium problematic because it tin beryllium financed via stock-dilution. If nan institution reduces nan issuance of communal banal arsenic it has successful erstwhile quarters, it will beryllium a axenic benefit, and SBC would not beryllium considered arsenic a problem because it could spell done an equity pool. The rumor is that nan equity excavation is finite, truthful if nan institution wants to connection ample SBC, it must dilute its stock. This is an highly antagonistic parameter for semipermanent investors. However, arsenic I've antecedently mentioned, nan magnitude of SBC arsenic good arsenic nan issuance of caller banal is declining significantly, but is not yet astatine a comfortable level.

I judge nan biggest risks are valuation and imaginable banal dilution arsenic a consequence of nan SBC program. Due to nan aforementioned factors, it is difficult to cipher an meticulous FCF contempt a dependable summation successful gross (SBC, banal dilution). From this perspective, I favour a awesome valuation instrumentality from Seeking Alpha pinch a C- valuation grade, but pinch a superior attraction connected EV/Sales (Forward) and Price to Sales (Forward), some of which are importantly supra nan assemblage median.

Palantir - Valuation grade

Palantir - Valuation people (Seeking Alpha)

I judge that Palantir should person a premium to nan sector's median valuation score, let's opportunity higher by 40-50% owed to its unsocial merchandise and coagulated maturation trajectory, expectations, and debased gross volatility. On nan different hand, this premium should beryllium reduced successful portion owed to nan precocious likelihood of early banal dilution. I do not see Palantir to beryllium undervalued, but it is reasonably weighted nether nan existent marketplace conditions. This is nan logic for nan Hold standing astatine $10, but astatine $6-$8 per stock I would beryllium highly bullish.

This article was written by

Patrik Mackovych floor plan picture

I graduated from nan University of Economics successful Bratislava and successfully passed nan Finance, Banking, and Investments programme pinch a Bachelor's degree. In nan lawsuit of a Master's degree, I person been studying banking. I worked arsenic a macroeconomic expert successful nan biggest slope successful Slovakia (Slovenska sporitelna). I attraction connected macroeconomics, chiefly connected monetary argumentation and nan financial market. Currently, I´m moving arsenic Investment Analyst. I americium keen connected analyzing various companies and creating my investing strategies and ideas.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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