Palantir: Successfully Commoditizing AI Tools
Just_Super
PLTR Proves That It Is Ahead Of The AI Race
Palantir Technologies Inc. (NYSE:PLTR) has maintained its momentum of achieving GAAP profitability for FY2023 indeed, especially demonstrated through the excellent FQ1'23 performance. It reports revenues of $525.19M (+3.2% QoQ/ +17.6% YoY), partly attributed to the pulled-forward recognition from the recent SPAC bankruptcies.
Nonetheless, we are glad that this event contributed to its first-ever GAAP operating income of $4.12M (+123.1% QoQ/ +110.4% YoY) and GAAP EPS of $0.01 (inline QoQ/ +120% YoY) in the latest quarter. Its gross margins have also improved to 79.5% (inline QoQ/ +0.6 points YoY), significantly aided by the moderating of operating expenses to $413.4M (-2% QoQ/ +5.6% YoY), through several key optimization approaches including layoffs.
Furthermore, PLTR's Stock-Based Compensation expenses have rapidly declined to $114.7M (-11.3% QoQ/ -23.1% YoY) in FQ1'23, triggering an annualized sum of $458.8M (-18.7% YoY or -41% from FY2021 levels), easily countering the bears' sorest point.
This is on top of the SaaS company's robust FY2023 revenue guidance of $2.21B (+15.7% YoY) and adj. income from operations of $531M (+26.1% YoY) at the midpoint, expanding its adj. profit margins to 24% (+2 points YoY).
As a result, it appears that the peak recessionary fears have accelerated PLTR's path towards improved operating efficiency and GAAP profitability, one that we have witnessed with many tech companies, most notably Meta Platforms (META) and Amazon (AMZN).
Interestingly, PLTR's offerings similarly allow its customers to better improve their efficiencies while reducing operating expenses, a theme that is seemingly more common during these uncertain macroeconomic environments.
As a testament to its valuable product offerings, the SaaS company's total customer count has already grown to 391 in FQ1'23 (+6.5% QoQ/ +41.1% YoY), with its commercial customer count also rising to 280 (+7.6% QoQ/ +52.1% YoY) at the same time. Particularly, it has observed increased pilot conversions and platform expansions, despite the supposed tightened commercial spending thus far.
We suppose this may also be attributed to PLTR's strategic choice of focusing on onboarding customers through short-term contracts, with its short-term Remaining Performance Obligations [RPO] rising to $529M (+2.3% QoQ/ +7.9% YoY) by the latest quarter.
The same approach has been previously observed with CrowdStrike (CRWD), which chose to offer annual contract renewals and multi-phase payment terms since last year, instead of the usual multi-year contracts. It has resulted in improved rates of contract wins thus far, ensuring its intermediate-term success.
In addition, PLTR has moderated its capital expenditures to $4.75M (-3.2% QoQ/ -68.7% YoY), generating stellar Free Cash Flow [FCF] of $188.9M (+155.7% QoQ/ +832.3% YoY) in FQ1'23. Otherwise, we may see an annualized FCF of $755.6M (+311.3% YoY), demonstrating its improved profitability then.
PLTR 1Y Stock Price
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Given these stellar strategies and numbers, it is unsurprising that PLTR has rallied tremendously in the days after its recent earnings call, temporarily breaking through its previous April 2023 resistance levels.
The optimism is likely attributed to the SaaS company joining the large language model hype as well, recently introducing its new AI platform, AIP. The latter has been touted as revolutionary, allowing customers to constructively "extract value" across the latter's proprietary and external data, while automating workflow and decision-making processes layered with conversational AI tools.
Given AIP's immense integration potential with PLTR's existing platforms, Foundry and Gotham, the accelerated pace of government and commercial adoption may eventually boost its top and bottom-line growth in the near term.
The same has been discussed in the recent FQ1'23 earnings call by Alex Karp - CEO of PLTR, Ryan Taylor - CRO of PLTR, and Shyam Sankar - CTO of PLTR:
We're already seeing unprecedented demand for AIP (in the CEO's 20 years in PLTR)... We are moving fast to ensure existing customers can quickly deploy AIP beside Gotham and Foundry to transform their operations with intelligent, contextual decision-making and sophisticated automation and coordination from the battlefield to the boardroom. (Seeking Alpha)
While "hallucinations" and "data accuracy" have been a great concern for those using AI chatbots, we suppose the SaaS company's long-term expertise and guardrails may be invaluable here. This is especially given its IL6 accreditation in the federal government, with the endorsement demonstrating that it met "DISA's rigorous security and compliance standards ... for some of their most sensitive work."
Nonetheless, we also want to warn investors to not chase the current rally yet. As a testament to its volatility, PLTR has been trading sideways over the past year. It is unlikely that the stock may successfully break out from these resistance levels as well, since we have seen a similar momentum after the FQ4'22 earnings call in February 2023.
After the optimism was digested, the stock returned to its March 2023 support levels several times, implying Mr. Market's unwillingness to reward the company's GAAP profitability.
Therefore, while its forward execution and long-term prospects appear robust, we will only rate the PLTR stock as a cautious Buy here, assuming that the portfolio is also sized appropriately in the event of capital losses, since the economic downturn may only lift by 2025.
Then again, we suppose there is still an excellent +42.1% upside potential to our price target of $13.50 for investors with higher risk tolerances and long-term investing trajectories. This is based on the market analysts' projected FY2025 EPS of $0.32 and its NTM P/E valuation of 42.33x.
In addition, assuming that the PLTR stock successfully bounced at its April 2023 resistance of $9, we may see a sustainable support level form in the near term, improving the margin of safety for those who add there. Impressive, in our view.
Source: Seeking Alpha
