Palantir Technologies Inc. (PLTR, Financial) is a global software company that was originally backed by the CIA and Peter Thiel (the co-founder of PayPal (PYPL, Financial)). The company has an intelligent CEO, Alex Karp, who has been hammering the benefits of artificial intelligence for many years. Now it looks as though his rhetoric is coming true and Palantir has grasped the opportunity with both hands.
In this discussion, I will break down Palantir's latest AI platform as well as its earnings for the second quarter. Let’s dive in.
AI platform
Palantir offers a number of software platforms with a variety of applications. Its flagship Gotham platform is the so-called "operating system for global decision making," offering a variety of applications for defense, intelligence and law enforcement organizations.
Its second product is the Foundry platform, which has been dubbed the “operating system for the modern enterprise.” It enables a company to “weave data” into its everyday decision-making. Applications include everything from health care to anti-money laundering.
Finally, its Apollo platform enables software to be deployed rapidly across multiple environments.
Most of Palantir's core platforms are AI-powered and involve various machine learning models. However, at its AIP Conference in June, Palantir took things one step further and announced its artificial intelligence platform.
Called Palantir AIP, the platform enables an organization to leverage large language models and other AI models with their own first-party data. This can also be done directly inside an enterprise's private network. This may not seem like a big deal, but ChatGPT (by Open AI) has actually been banned by many organizations as the data given to the platform can then be used to train the model and potentially leak intellectual property.
Palantir's platform also enables “AI Agents” to be created, which can be designed to complete certain tasks and work together.
The two main applications include defense and military as well as the enterprise. The platform also includes an auditing feature that allows management to track prompts used, which helps with risk management and compliance.
Palantir has gained traction with this product already. The company announced a warranty claims copilot for a U.S auto manufacturer, as well as a pharmaceutical assistant for Novartis (NVS, Financial) and a supply chain copilot for a major beverage company.
Solid second-quarter results
Palantir reported solid financial results for the second quarter of 2023. Its revenue of $533.3 million increased by 13% year over year and 2% sequentially.
The top line did grow slower than the 17.66% reported in the first quarter and the 26% rate in the prior-year quarter. However, during the earnings call, Palantir's management noted there is “unprecedented interest” from a variety of new and existing customers for its AI products. Therefore, I believe this interest will just take time to show up as actual revenue.
Palantir continues to focus on larger customers, with the its revenue per customer from the top 20 increasing by 15% year over year to a staggering $53 million per customer. Therefore, despite the longer sales cycles with larger customers, the potential is huge.
Breaking down Palantir by segment, the company reported commercial revenue of $232 million, which increased by 10% year over year. This figure did decline by 2% sequentially, but this was expected due to a decline in strategic commercial contract revenue. If we exclude this, Palantir's commercial revenue actually rose by a solid 19% year over year.
Its U.S. commercial customers also increased 35% year over year, which is a positive sign for its local business.
The company also continues to grow revenue internationally with 4% year-over-year growth reported at $129 million. Palantir is seeing slower growth in Europe, but part of this could be cultural differences as businesses may be more risk-averse to adopting new solutions.
Moving onto government, the company reported revenue of 15% year over year to $302 million, contributing to 57% of its total revenue. This is a positive sign as government revenue tends to be very consistent and offers huge opportunities for upselling.
Its U.S. government business reported a 111% sequential increase in total contract value bookings. This was driven by sevral deals, including a multiyear contract with the U.S. Special Operations Command worth up to $463 million. There were also new contracts won with both the Air Force and Space Force worth up to $110 million over a multiyear period.
International government revenue was also solid with a 31% year-over-year increase to $76 million. This was driven mostly by deals with U.K. government organizations such as the National Health Service, which is the second-largest single-payer health care system in the world. In addition, Palantir has deals with the U.K. Ministry of Defense and the Royal Navy.
Margins and balance sheet
Palantir has previously been criticized for being unprofitable, with a loss of $17.8 million reported in the fourth quarter of 2022. However, in the first quarter of 2023, the company reported $4.1 million in profit, which grew to $10.1 million in the second quarter.
The company’s adjusted gross margin (excluding stock-based compensation) also reached 81%.
Its adjusted expenses were $398 million, up 9% year over year but down quarter over quarter.
The company is also in talks to potentially link the success of its new AIP platform to employee equity compensation in order to align incentives.
Moving on to cash flow, the company reported $96 million in adjusted free cash flow at an 18% margin.
Palantir has a solid balance sheet with $3.1 billion in cash, cash equivalents and short-term investments. In addition, the company secured the option for $500 million in extra liquidity via a revolving credit facility.
Management is confident in growth for the next few quarters as the company raised its revenue guidance to greater than $2.2 billion for the full year.
Valuation
Palantir trades with a forward price-sales ratio of 17, which is fairly valued relative to its historic average.
However, the GF Value Line indicates a fair value of $15.54 and thus, indicates the stock is modestly overvalued at the time of writing. This is expected given the excitement surrounding AI's potential.
Final thoughts
Palantir’s CEO has really leaned into the AI opportunity, so this could be a major turning point for the business. It should also benefit from the uncertainty surrounding military action around the world, with rumors that its software is already helping out in the Russia-Ukraine war. Its new AI platform has attracted a lot of interest and thus, it will definitely be interesting to see how many customers sign on the dotted line next quarter.
