Palantir Technologies Inc. (PLTR, Financial) is a software company specializing in big data analytics and integration that has been garnering the market's attention as one of the artificial intelligence darlings and is emerging as a pivotal government defense supplier amid increasing geopolitical tensions.
The company stands out after achieving its first profit and demonstrating consistent year-over-year growth in top and bottom-line results. With effective expense management and minimal debt, Palantir is well-positioned for future expansion. Additionally, its early-stage penetration of end markets, particularly in the commercial segment, alongside its introduction of an artificial intelligence platform, or AIP, makes a compelling growth stock case.
Despite its premium valuation compared to the broader market, similar to other high-growth peers, historical precedents suggest potential substantial share price appreciation as profitability becomes more pronounced. Overall, Palantir enjoys a stable financial base, a promising growth trajectory and a valuation that can sustainably reflect its potential over time.
The stock has had a stellar performance over the last 12 months, with over 100% gains. So far in 2024, gains are around 30%. Much of this rally has to do with the Street anticipating the company will double its profits over the next several years.
However, the stock's rally experienced a significant pause following the company's first-quarter results, disappointing the market despite an earnings beat and an upward guidance revision.
In this analysis, I delve into why Palantir shares should continue their rally and how the recent pullback could present an opportunity for investors to buy the dip.
Why Palantir's price plummeted
Palantir's first-quarter earnings were far from bad. However, the results disappointed the market as shares fell more than 15% in the following days.
The big data company reported earnings of 8 cents per shaer, beating market estimates, while revenue came in at $634 million, indicating growth of 21% compared to the same quarter last year. In the U.S. alone, the company generated $150 million in revenue in the commercial segment, marking an annual increase of 24%. Palantir also revealed guidance suggesting the regional market should maintain its position of dominance and become one of the primary growth drivers in the short term.
I believe Palantir's shares plummeted mainly due to the company's reported expenses, totaling $437.20 million, representing an annual increase of 5%. However, the most concerning aspect was CEO Alex Karp's statement regarding future expectations of increased expenses. He said:
"While we expect the expenses to ramp starting in Q2 through the back half of the year, we remain focused on calibrating expense growth below revenue growth for the full year in order to continue delivering on our goals of sustained GAAP profitability and GAAP operating income."
For clarification, when Palantir stated that it expects expenses to start ramping up in the second quarter and continue throughout the year, this logically implies that each subsequent quarter will see an increase in this number. Naturally, this makes investors apprehensive, as Karp indicated that spending will escalate at a higher rate throughout the year.
Palantir's business is experiencing significant demand for its services, prompting investments in hires and consequently leading to increased expenses. However, I believe investors were implicitly factoring this in, hoping the company could sustain growth results with its existing capacity and current staff, which would not be feasible to maintain cost stability.
This disappointment stemmed from expecting revenue to grow while costs remained stable, thereby expanding profit. Consequently, I believe this contributed to the decline in the stock price.
Why Palantir's shares could continue to rise
Palantir recently provided clarity on its direction for the year ahead. The company revised its revenue guidance 2024, projecting $2.68 billion at the midpoint, with operating income expected to range between $868 million and $880 million. It emphasized this upgrade also applies to operations income, reiterating the free cash flow projection at $900 million at the midpoint. Moreover, it anticipates profitability every quarter of 2024, signaling an ambitious outlook.
Analyst consensus forecasts show Palantir ending 2024 with an earnings per share estimate of 33 cents, implying a price-earnings ratio of 62- still 230% above the industry average. However, considering its growth prospects, primarily centered around its AIP, the company trades at a forward non-GAAP PEG ratio of 1.37, factoring in earnings per share long-term growth consensus estimates, which is nearly 30% below the application software industry average.
Source: Koyfin
Another noteworthy aspect is that Palantir has significantly diluted its shares over the last three years by approximately 2.34 billion. This move was prompted by its substantial share price hike in 2021 and the necessity to raise capital to fuel growth, reduce debt and enhance liquidity. In addition to a more challenging macroeconomic environment in recent years, I believe the dilution of the company's equity has also contributed to shaking investor confidence and impacting Palantir's share price.
Source: Koyfin
Palantir ended the first quarter with $3.90 billion in cash and equivalents, providing a strong position to execute share buybacks. During the earnings call, the company announced it repurchased roughly 500,000 shares as part of its share repurchase program. As of the end of the quarter, it has approximately 990 million shares remaining from the total original authorization.
This share repurchase activity implies a reduction in the number of shares outstanding, typically resulting in more ownership of the company's stock concentrated among existing shareholders. This move potentially leads to increased earnings per share and greater control over decision-making for those shareholders.
The bottom line
I believe Palantir is one of the most promising companies positioned to ride the AI boom smoothly. Its artificial intelligence platform has gained significant traction through demo workshops, resulting in substantial revenue growth, surpassing $1 billion over the last 12 months. The success of the AIP workshops indicates their potential to drive adoption and revenue growth further.
The recent downturn in the share price rally following the earnings report appears, in my view, as a slightly exaggerated perception on the part of the market. There is a notion that the company could achieve more by better balancing expenses, which may not be entirely realistic going forward. However, I anticipate the expected more significant revenue demand, coupled with the share repurchase program, should offset the projected increase in expenses shortly. I believe this turnaround is imminent, and with it, Palantir will resume generating good returns for investors.
