Stock Analysis & Ideas

Palantir’s Bullish Case Remains Compelling after Big Drop

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After seeing its shares collapse over 80% from its peak, Palantir might be poised to deliver strong returns going forward.

In this article, we are taking a look at Palantir (NASDAQ: PLTR), whose shares are currently trading more than 83% off their all-time highs. Despite the stock’s performance so far, Palantir’s bullish case remains as strong as ever. Once the muddy waters clear, the market will hopefully see the value in Palantir’s business, which is likely to result in revitalized investor sentiment.

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This year’s lasting sell-off has exposed the shady side of multiple high-growth stocks that peaked in 2021. Unsustainable business models, massive stock-based compensation, absurd forward outlooks, and several other value-destroying catalysts eventually revealed the difference between a quality company and a phony unicorn.

That said, the red tsunami’s wrath carried away several high-quality stocks with robust business models in the depths of the ocean. Although many companies became overvalued following last year’s market euphoria, it doesn’t mean that all of them deserved to plummet 80%-90% from their past highs.

Palantir – Incredible Product and Government Ties

Ask any software engineer, and they will tell you that Palantir’s platforms are out of this world. I am not an expert in the area, but I know value when I see it. Just watch the highlights from Palantir’s recent FoundryCon, where some of Palantir’s most prominent commercial clients went over how the company’s platforms help them unlock value, make better decisions, and save millions of dollars in unproductive costs.

Palantir’s government business is even more thrilling, with Palantir building stronger ties by the day, with essentially all of America’s Federal Agencies and the U.S. Army. It’s safe to say that when it comes to matters like counter-terrorism, classified data, and success on the battlefield, the government will go for the best, and Palantir has effortlessly monopolized the space.

Is Palantir’s Revenue Growth Slowing Down?

Investors have lately been worried that Palantir’s growth is slowing down. Indeed, in its Q3 results, the company reported revenue growth of just 22%, implying a significant deceleration from Palantir’s medium-term growth target of 30%. However, some context is needed. Specifically, Q3 is a low-seasonality period for Palantir, especially when it comes to government contracts, which usually take place in Q4.

Thus, it’s better to look at Palantir’s quarterly billings, which reached $509 million, up 47% year-over-year. Accordingly, in Q3, Palantir’s total contract value, or TCV, came in at $1.3 billion, including U.S. TCV of $1.1 billion, 90% of which was attributable to Palantir’s U.S. government business.

It’s also worth noting that TCV during the quarter was powered primarily by renewals and expansions of existing U.S. government contracts, which illustrates my previous point regarding seasonality, and demonstrates that Palantir’s revenue growth is not actually slowing down the way some investors seem to believe.

Additionally, Palantir’s customer count grew 66% year-over-year. In fact, the U.S. commercial customer count jumped to 132 at the end of Q3, a 124% increase year-over-year. However, you may wonder why this massive increase in customer count didn’t translate into an equally high increase in revenues?

Basically, Palantir is likely allowing its customer to initially utilize its platforms for free to demonstrate how they can create value before charging. Additionally, we go back to the same point about Palantir’s bookings growing significantly, which is revenue that will be recognized later. The company may have signed multi-year contracts, whose revenues will only appear on the income statement gradually as each quarter goes by.

Further, keep in mind that Palantir’s platforms are extremely sticky, with the opportunity to upsell with each contract renewal. Thus, the massive increase in customer growth should result in snowballing revenues in the coming years.

Palantir’s Profitability is Moving in the Right Direction

Palantir’s profitability prospects appeared rather soft following its IPO. However, the bottom line is gradually moving in the right direction. Firstly, Palantir features a high-margin business model with gross margins having been sustained above 80% consistently.

Additionally, stock-based compensation expenses have been declining. Year-to-date, stock-based compensation has amounted to $435.4 million compared to $611.3 million over the same period in 2021. Thus, adjusted operating margins are set to expand as the company scales.

Finally, improvements in profitability are already observable in the company’s adjusted free cash flow metric. Adjusted free cash flow has amounted to $127 million year-to-date, representing a margin of 9%. Q3 also marked Palantir’s eighth consecutive quarter of positive adjusted free cash flow. The point here is that Palantir does not exhaust its cash position in order to grow, meaning it can still pursue its high-growth targets while self-funding the total of its operations.

What is Price Target for PLTR Stock?

Turning to Wall Street, Palantir Technologies has a Hold consensus rating based on two Buys, four Holds, and four Sells assigned in the past three months. At $9.13, the average Palantir Technologies stock forecast suggests a 23.55% upside potential.

Takeaway – Time for Palantir to Rise from the Ashes

The plunge in the share price of Plantir may not have been entirely unjustified. Sure, during its early days as a public company, Palantir’s profitability prospects appeared quite thin, and its stock was likely overvalued. However, with shares now completely beaten down, revenue growth is set to re-accelerate, driven by a great customer count expansion and TCV growth. With the company already generating positive free cash flow, it may be time for Mr. Market to reconsider the thesis on Palantir.


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