The past few months have been quite harsh for us Palantir (PLTR) shareholders, with the stock sliding lower by the day.
On the one hand, anybody who’s studied the company’s capabilities knows that Palantir features multiple qualities, including high-quality revenues.
The company continues to exceed its own growth estimates, expanding its contractually secured revenues swiftly. Additionally, the business model is highly scalable, leading to juicy margins.
On the other hand, bears have criticized Palantir’s excessive stock-based compensation and elevated valuation levels. That said, the company’s most recent results highlighted positive free cash flow levels, which should comfort investors regarding Palantir’s GAAP profitability prospects. I remain bullish on the stock.
Bullish Case
While the stock’s continuous decline is seemingly worrying, I remain confident in Palantir’s bullish case. The foundation of its bull case lies in Palantir’s robust growth and revenue generation capabilities.
Revenues grew 34% year-over-year to $433 million in Q4 2021, with the company’s Commercial segment growing 47% year-over-year. More impressively, U.S.-based commercial revenues grew by 132% year-over-year.
Palantir continues to close new multi-year contracts, extending its future incoming cash flow backlog. During the period, the company closed 64 deals of $1 million or more, of which 27 deals were worth $5 million or more, and 19 deals were worth $10 million or more.
What’s appealing about these contracts is that through them, Palantir generates recurring revenues. Effectively, with every new client the company signs, it accumulates growing sources of revenues.
Some clients are highly likely to augment their contracts in the future for further capabilities, further boosting Palantir’s incremental cash flows.
The growth in the company’s Commercial segment is certainly going to be the main revenue growth driver moving forward. However, what honestly makes Palantir’s revenues of high quality, is that a significant chunk is sourced from the U.S. government and its allies.
Defaulting defense contracts is virtually unheard of, so the company features minimal counterparty risk.
Overall, Palantir’s revenues should keep expanding swiftly in the medium term based on management’s guidance and ongoing growth trajectory.
The great news in its latest report was that the company is now free-cash-flow positive. Adjusted free cash flow came in at $104 million during the quarter, representing a 24% margin. This is a rich free-cash-flow margin considering that it should expand further as the company scales, likely resulting in very high profitability levels.
Finally, while many investors and analysts continue to criticize the company’s elevated stock-based compensation levels, I remain a supporter as it constitutes the ultimate motive for the best talent in the world to devote their careers to Palantir. This is vital, considering the complexity and capabilities of Palantir’s platforms.
Wall Street’s Take
Turning to Wall Street, Palantir Technologies has a Hold consensus rating, based on one Buy, four Holds, and three Sells assigned in the past three months. At $13.57, the average Palantir Technologies price target implies 22.1% upside potential.
Conclusion
Nobody knows where Palantir will be in five or 10 years is merely speculating. Palantir’s platform is way too complicated, too powerful, and hopefully, it will be too profitable.
I choose to believe in the company’s prospects ahead, but I warn that its obscure operations leave little room for the average investor to make valid predictions. Hence, risks attached to the company’s investment case definitely remain.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
