This post was originally published on this site
Initially founded to serve the U.S government, Palantir has now expanded to helping other governments and businesses through its data analytics and artificial intelligence (AI) tools.
Palantir has been one of the fastest growing tech companies in recent years, thanks to its aggressive investment in recruiting and retaining top talent, while also growing its sales team. Palantir is currently aiming to capture as much of its $120-billion total addressable market as it can, and management sees favorable market trends ahead, particularly the increasing use of data in business decisions and operations.
I am neutral on Palantir, given that its tremendous growth momentum and runway is largely offset by its rich valuation. (See PLTR stock charts on TipRanks)
Strengths
Palantir has been able to maintain strong client relationships and charge a premium for its consulting services because of the valuable data analytics tools it provides.
It has also made it easier to integrate with existing datasets, which means customers don’t have much choice but to stick around if they want access to this specialized AI technology.
Recent Results
Palantir’s revenue grew to $376 million, up 49% year-over-year, in Q2 2021. This was in large part due to 66% year-over-year growth in government revenue, on the back of new deals with agencies like the U.S. Air Force, U.S. Coast Guard, U.S. Army, and Center for Disease Control.
Furthermore, its U.S commercial revenue surged 90% year-over-year. Palantir also saw 175% year-over-year contract value growth, and added 20 net new customers during the quarter.
Last, but not least, Palantir saw its profitability metrics improve meaningfully year-over-year. Adjusted free cash flow margin came in at 13%, adjusted gross margin rose by 200 basis points year-over-year, and the company’s contribution margin improved by 300 basis points year-over-year.
As a result, management doubled Palantir’s full-year adjusted free cash flow guidance from over $150 million to over $300 million.
Valuation Metrics
While the growth is spectacular, Palantir has a very rich valuation at present and is diluting shareholders through its aggressive stock-based compensation program.
In fact, when accounting for the stock-based compensation, the company is free cash flow negative and running a loss.
Furthermore, its EV/EBITDA is a whopping 105.4x, and its NTM market cap-to-free cash flow ratio is an incredibly high 333x. While revenue growth is strong, it will need to grow at a high rate for a long period of time to justify PLTR’s current valuation.
Wall Street’s Take
From Wall Street analysts, Palantir earns a Moderate Sell analyst consensus, based on one Buy rating, two Hold ratings, and three Sell ratings in the past three months. The average PLTR price target of $23.80 puts the downside potential at 10.2%.
Summary and Conclusions
Palantir operates in one of the most dynamic industries in the world, and should continue to grow rapidly in the foreseeable future.
Between its wide moat government business, which is seeing very strong growth, and its innovative commercial business, which is just starting to see growth accelerate, Palantir is positioned to see revenue increase many times over in the coming decade.
That said, the valuation is extremely rich right now, and analysts on Wall Street are moderately bearish on Palantir’s total return prospects.
As a result, it might be best to wait for the next pullback in share price before buying shares.
Disclosure: On the date of publication, Samuel Smith had a long position in PLTR.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
