Palantir ($PLTR): The Quiet Giant Reshaping Global Intelligence and Enterprise Data

Table of Contents

1. Summary

2. Is now the time to buy $PLTR?

3. PALANTIR Q3CY24 Highlights:

4. Data Analytics

5. Sales Growth

6. Billings

7. Customer Acquisition Efficiency

8. Gross Margin & Pricing Power

9. Operating Margin

10. Cash Is King

11. Balance Sheet Assessment

12. Final Thoughts

Summary

Started by Peter Thiel after seeing US defence agencies struggle in the aftermath of the 2001 terrorist attacks, Palantir (NYSE:PLTR) offers software as a service platform that helps government agencies and large enterprises use data to make better decisions.

• Powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits

• Impressive operating margin shows it has a highly efficient business model and disciplined cost controls

• Rapid sales cycles signal outstanding integration capabilities and capital efficiency

Is now the time to buy $PLTR?

Palantir is trading at $80.70 per share, or a 62.5x forward price-to-sales ratio. The premium valuation means there’s much good news priced into the stock - we certainly can’t argue with that.

Are you a fan of the company and believe in the bull case? If so, you can own a smaller position, as high-quality companies tend to outperform the market over a long-term period regardless of entry price.

PALANTIR Q3CY24 Highlights:

• Revenue: $725.5 million vs analyst estimates of $703.7 million (3.1% beat)

• Adjusted EPS: $0.10 vs analyst estimates of $0.09 (beat by $0.01)

• EBITDA: $283.6 million vs analyst estimates of $244.9 million (15.8% beat)

• Revenue Guidance for Q4 CY2024 is $769 million at the midpoint, above analyst estimates of $744 million

• Gross Margin (GAAP): 79.8%, in line with the same quarter last year

• Operating Margin: 15.6%, up from 7.2% in the same quarter last year

• EBITDA Margin: 39.1%, up from 30.8% in the same quarter last year

• Free Cash Flow Margin: 59.9%, up from 21.9% in the previous quarter

• Billings: $676.9 million at quarter end, up 33.8% year on year

• Market Capitalization: $93.88 billion

Data Analytics

Organizations generate a lot of data that is stored in silos, often in incompatible formats, making it slow and costly to extract actionable insights, which in turn drives demand for modern cloud-based data analysis platforms that can efficiently analyze the siloed data.

Other companies with similar data management capabilities include Snowflake, Alteryx and cloud service providers such as Google, Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Palantir’s 22.7% annualized revenue growth over the last three years was decent. This is a useful starting point for our analysis.

This quarter, Palantir reported robust year-on-year revenue growth of 30%, and its $725.5 million of revenue topped Wall Street estimates by 3.1%. Management is currently guiding for a 26.4% year-on-year increase next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 19.9% over the next 12 months, a slight deceleration versus the last three years. Still, this projection is noteworthy and shows the market is baking in success for its products and services.

Billings

In addition to revenue, billings is a non-GAAP metric that sheds additional light on Palantir’s business quality. Billings is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Over the last year, Palantir’s billings growth has been impressive, averaging 22.9% year-on-year increases and punching in at $676.9 million in the latest quarter. This performance was in line with its revenue growth, indicating robust customer demand and a strong sales pipeline. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

Customer Acquisition Efficiency

Customer acquisition cost (CAC) payback represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for marketing and sales investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Palantir is extremely efficient at acquiring new customers, and its CAC payback period checked in at 18.2 months this quarter. The company’s efficiency indicates that it has a highly differentiated product offering and strong brand reputation, giving it the freedom to invest resources into new growth initiatives while maintaining optionality.

Gross Margin & Pricing Power

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Palantir’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an impressive 81.1% gross margin over the last year. Said differently, roughly $81.10 was left to spend on selling, marketing, and R&D for every $100 in revenue.

Palantir’s gross profit margin came in at 79.8% this quarter, which is in line with the same quarter last year. Zooming out, Palantir’s full-year margin has been trending up over the past 12 months, increasing by 1.2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after hiring engineers to develop products, marketing and selling them, and, most importantly, keeping them relevant through research and development.

Palantir has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 13.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Palantir’s annual operating margin rose by 12.1 percentage points over the last year, showing its efficiency has improved.

In Q3, Palantir generated an operating profit margin of 15.6%, up 8.4 percentage points year on year. The increase was solid, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Cash Is King

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Palantir has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 39.2% over the last year.

Palantir’s free cash flow clocked in at $434.5 million in Q3, equivalent to a 59.9% margin. This result was good as its margin was 34.7 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Palantir’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 39.2% for the last 12 months will decrease to 30.5%.

Balance Sheet Assessment

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Palantir is a profitable, well-capitalized company with $4.56 billion of cash and $254.9 million of debt on its balance sheet. This $4.31 billion net cash position is 4.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Final Thoughts

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Palantir is a rock-solid business worth owning. For starters, its revenue growth has been solid over the last three years. And while its forecasted free cash flow margin suggests the company will ramp up its investments next year, its bountiful generation of free cash flow empowers it to invest in growth initiatives. On top of that, Palantir’s operating margin expansion shows Palantir has become more efficient at building and selling its software.

Palantir’s price-to-sales ratio based on the next 12 months is 62.5x. There’s no doubt it’s a bit of a market darling given the lofty multiple, but we don’t mind owning a high-quality business, even if it’s expensive. It’s often wise to hold investments like this for at least three to five years, as the power of long-term compounding negates short-term price swings that can accompany high valuations.