Boosting Our Palantir Price Target as it Sees 'Unwavering Demand'

Every once in a while, from the realms of high-tech startups, low-priced stocks and scoffed-at enterprises ridiculed for being over-valued or being misunderstood, rises a champion. Every once in a while, a company or stock like Palantir Technologies PLTR is crowned such a champion. 

This is such a time, though I don't know if there has ever been a company or stock quite like Palantir. Huzzah, Palantir! Huzzah to the retail investors who hopped on board and never stopped believing! You, the loyal masses, who have been on board since the beginning and those who have hopped on along the way, I salute you. Rock and roll.

Palantir Technologies Reports

On Monday evening, long-time Sarge fave and former "Stocks Under $10" portfolio core holding Palantir Technologies went to the tape with the firm's third quarter financial results. For the three-month period ended September 30, Palantir posted an adjusted EPS of $0.10 (GAAP EPS: $0.06) on revenue of $725.516 million. These top- and bottom-line results all beat Wall Street, while the top-line print was good for year-over-year growth of 30%. The adjustments made were primarily made for the purpose of stock-based compensation.

Within the data, U.S.-driven revenue increased 44% year over year and 14% sequentially to $499 million. U.S. commercially-driven revenue increased 54% year over year and 13% sequentially to $179 million, while U.S. government driven revenue increased 40% year over year and 15% sequentially to $320 million. Thanks to increased defense spending, the pace of quarterly growth in U.S. government sales made a nearly four-year high. The firm closed 104 deals for the quarter worth more than $1 million, while customer count grew 39% year over year and 6% sequentially.

Operations

As revenue generation grew 30% to $725.516 million, the cost of that revenue increased (+35.9%), leaving a gross profit of $578.877 million (+28.6%) This took gross margin down to 79.8% from 80.7%. Operating expenses grew 13.5% to $465.737 million, leaving GAAP operating income at $113.14 million (+183%). That put the firm's GAAP operating margin at 15.6%, up from 7.2%. After accounting for interest, other income/losses and taxes, GAAP net income attributable to shareholders printed at $143.525 million (+101%). This works out to a fully-diluted GAAP EPS of $0.06.

'Unwavering Demand'

CEO Alex Karp was quite quotable last night.

From the press release: “We absolutely eviscerated this quarter, driven by unrelenting AI demand that won’t slow down. This is a U.S.-driven AI revolution that has taken full hold. The world will be divided between AI haves and have-nots. At Palantir, we plan to power the winners."

From Karp's letter to shareholders: "This is still only the beginning. The growth of our business is accelerating, and our financial performance is exceeding expectations as we meet an unwavering demand for the most advanced artificial intelligence technologies from our U.S. government and commercial customers. The world is in the midst of a U.S.-driven AI revolution that is reshaping industries and economies, and we are at the center of it.

From the earnings call: "Given how strong our results are, I almost feel like we should just go home. But we — we made — we've been saying since we went public in a DPO that we would build infrastructure to make America and its allies the dominant force in the world."

Fundamentals

For the quarter, Palantir generated operating cash flow of $419.772 million. Add to that cash paid to employer taxes related to stock-based compensation of $18.756 million, less capex spending of $3.985 million, and that leaves free cash flow of $434.543 million, good for a free cash flow margin of a whopping 60%. The firm does not payout a cash dividend to shareholders but did repurchase $45.598 million in common stock.

Turning to the balance sheet, Palantir ended the quarter with a cash position of $4.565 billion. Yes, that's with a "B." Current assets add up to $5.352 billion. Current liabilities add up to $943.456 million, that includes deferred revenue (which is not a true financial obligation) of $236.608 million. That leaves Palantir with a headline current ratio of 5.68, and a current ratio adjusted for deferred revenue of 7.57. These are incredibly muscular ratios.

Total assets amount to $5.768 billion while total liabilities less equity comes to $1.177 billion. There is no debt of any kind on this balance sheet. Palantir still has (because I have said it before) a pristine, fortress-like balance sheet. Possibly the cleanest, strongest balance sheet I have ever seen for a firm this size.

Guidance

For the current quarter, Palantir is projecting revenue of $767 million to $771 million, which is well above the $741 million that Wall Street was looking for. The firm also sees adjusted income from operations of $298 million to $302 million.

For the full year, the firm is now expecting to generate revenue of $2.805 billion to $2.809 billion. This takes the low end of the range above Wall Street's consensus view for $2.76 billion. The firm sees U.S. commercial revenue growth of at least 50%, adjusted operating income of $1.054 billion to $1.058 billion and free cash flow of greater than $1 billion. Lastly, the firm reiterates its expectations for positive GAAP operating and net income for each and every quarter of the year.

Wall Street (Sometimes, You Have to Laugh)

Since these earnings were released last night, I have come across six highly-rated (four-plus stars at TipRanks) that have opined on PLTR. Across the six, there are three "hold" or hold-equivalent ratings and three "sell" or sell-equivalent ratings. Gotta love these guys. We've been kicking their tails from one end of Wall Street to the other all year, no... make that for several years, and they just don't admit that they got this one wrong.

The average target price across the six is $32.67. If we omit the high and the low, the average target is $32.75. I know, you heard about Dan Ives of Wedbush increasing his target price. Well, Ives has been right about Palantir, but wrong about a few other names this year. Ives is only rated at three stars by TipRanks now, so he no longer makes the cut as a highly-rated analyst. That said, he did reiterate his "outperform" rating on PLTR, while taking his target price from $45 to $57.

My Thoughts

What a quarter. Demand is impressive. Profitability and sales are better than expected. Cash flows are robust. The cash position is huge. No debt on the books anywhere. At least from the "big data" AI perspective, Palantir Technologies is the king. They are the one software company so far that has figured out the whole monetization of "AI thing" as a service platform provider and not as an infrastructure builder.

Readers will see that, with this morning's "gap up" opening, PLTR has cracked through what could have turned out to be a double-top reversal pattern. We now adopt the peak of that faux double top as our new pivot. Relative strength is back to beast mode, and the daily MACD appears to be about to move back towards a more bullish posture. Last, but not least, our $48 target price has been breached, so what do we do? We make a "token sale," so we don't look like fools if the stock comes in and we figure out our new target price for the balance of our long position. If indeed the shares do eventually come in, we repurchase the amount sold in that token sale.

Palantir Technologies (PLTR)

Target Price: $56 (up from $48)

Pivot: $45 (up from $40)

Add: Down to 50-day SMA ($38.60)

Add More Aggressively: Down to 200-day SMA ($27.80)

Panic: Loss of 200-day SMA

At the time of publication, Guilfoyle was long PLTR equity.